Is Economic Freedom a Moderator of the Relationship Between Bank Capital and Profitability?

Abstract

The study uses the GMM and panel OLS framework on the data of the US banks over the period ‎from 2002 to 2019 to reveal the moderating role of economic freedom on the ‎relationship between bank capital and ‎profitability. The overall findings show that ‎economic freedom and bank capital positively influence ‎banks' profitability. The results reveal that economic freedom positively (negatively) moderates the relationship between risk-based (traditional) capital ratio. Furthermore, the results also find heterogeneity in the relationship across different market conditions (before and after crisis) and bank characteristics (well or undercapitalized, high and low liquid banks). The results ‎remain robust for ‎alternative methodology and proxies. The heterogeneity of findings has ‎implications for ‎policymakers in banking for the improvement of the financial system.

Keywords

• bank capital
• economic freedom
• bank profitability
• commercial banks