The Relationship between Bank Capital, Risk-Taking and Profitability: Fresh Evidence from Panel Quantile Approach

Abstract

This study aims to reveal the relationship between bank capital (BC), risk-taking, and profitability for commercial banks in Turkey using panel quantile regression models (QRPD) with non-additive fixed effects (NAFE). Accordingly, we consider the data of 18 commercial banks for 2012-2022. Firstly, we concluded a positive relationship between banks' risk-based capital (RBC) and traditional capital ratios (CR) and return on assets (ROA); in contrast, there is a negative relationship between RBC and risk-weighted assets (RWATA). Secondly, we found a positive relationship between RBC and the loan loss provision ratio (LLPTA) in other periods except the contraction period and between CR and LLPTA in other periods except the expansion period. The findings also showed an inverted U-shaped relationship between RBC and the LLPTA and return on equity (ROE) and an N-shaped relationship between CR and ROE. Lastly, we discovered a positive relationship between RWATA and ROA and ROE, whereas a negative relationship exists between LLPTA and ROA. The findings provide valuable insights into the validity of the moral hazard, cost-skimping, regulatory assumptions, agency, portfolio and risk-bearing profit theories in the commercial banking sector and that risk, capital and profitability indicators are leading factors in banks’ stability.

Keywords

• risk-taking
• bank capital
• profitability
• commercial banks
• panel quantile
• risk alma
• banka sermayesi
• kârlılık
• ticari bankalar
• panel kantil