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Profitability, capital, and risk in US commercial and savings banks: Re-examination of estimation methods

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  • Paroush, Jacob
  • Schreiber, Ben Z.

Abstract

This study compares the relationships between the three main bank variables i.e., profitability, capital, and risk of US commercial and savings banks for the period 1995Q1-2015Q4. As the literature analyzes the relationship between these variables in pairs, thus suffering from an 'omitted variable bias' and a 'simultaneous equations bias', we examine whether these biases are statistically significant. We compare the common methodology of a three two-equation system with both a three-equation system and three separate OLS regressions. While there are significant differences in the coefficients of the three main variables within the sample period, we could not find substantial differences in out-of-sample forecast estimates.

Suggested Citation

  • Paroush, Jacob & Schreiber, Ben Z., 2019. "Profitability, capital, and risk in US commercial and savings banks: Re-examination of estimation methods," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 148-162.
    • Handle: RePEc:eee:quaeco:v:74:y:2019:i:c:p:148-162
    DOI: 10.1016/j.qref.2018.12.007
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    Cited by:

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    4. Lepetit, Laetitia & Tran, Phan Huy Hieu & Tran, Thu Ha, 2023. "Executive and non-executive employee ownership and bank risk: Evidence from European banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 291-319.

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    More about this item

    Keywords

    Profitability; Capital; Risk; Commercial banks; Savings banks; Simultaneous equations bias; Omitted variable bias;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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