Investigating the influence of ownership on the relationship between bank capital and the cost of financial intermediation

Abstract

This study investigated the simultaneous association between capital and the cost of financial intermediation (COFI) by bridging the gap of ownership effects on the nexus between capital and COFI. This study revealed several significant insights by using data from 44 commercial banks in Bangladesh between 2010 and 2021 and applying two-step system generalized methods of moments (2SGMM). First, a significant nonlinear bidirectional relationship exists between bank capital and COFI. The tendency to generate average and low COFI enables banks to acquire more capital than those with high COFI. In contrast, banks with high and average capital bases can maximize their COFI compared to low ones. Second, state-owned and conventional commercial banks are better positioned to source more capital. However, state-owned and Islamic commercial banks can strengthen the inverted U-shaped relationship between COFI and bank capital than private-owned and Islamic commercial banks. Finally, state-owned commercial banks do not experience the same benefits in COFI from capital increases as privately owned banks. Unlike Islamic commercial banks, conventional banks generate more COFI in the long run as capital rises. The findings provide helpful insights into shaping policy and regulations regarding emerging country's banking systems, especially capital, COFI, and ownership policies.

Keywords

• capital
• cost of financial intermediation
• bank ownership
• two-step system gmm
• emerging economy