Bank capital and risk in emerging banking of Jordan: a simultaneous approach

Financial risk has received increasing attention from policymakers and financial institutions. Therefore, the present study examines the relationship between capital and risk for Jordanian banks by using data from 2010–2019. The study employs fixed effect, random effect, GMM, and 3SLS. Our findings show that the capital requirement regulation has a positive impact on capital and risk rates. Moreover, the study also concludes that Jordanian banks hold more than the minimum regulatory capital requirements laid down by Basel II, III, and the CBJ. The banking sector increases its capital adequacy by raising its liquidity and reducing its tendency to take risks. Our results indicate a highly significant negative relationship between Jordanian commercial bank capital and risk. Liquidity risk, ROA and stock market capitalization are positively related to bank capital. The results of the study suggest that Jordanian banks should be involved in higher-risk lending actions and help increase competition in the banking sector.The banking sector plays a vital role in economic growth and bank capital serves as a buffer at the time of economic shock. Similarly, risk management is also crucial for the sustainable financial sector and economic development. Thus, this study employs a simultaneous approach in developing a relationship between bank capital and risk in the Jordanian banking sector. Our findings show that the capital requirement regulation has a positive impact on capital and risk rates. Our results also indicate a highly significant negative relationship between Jordanian commercial bank capital and risk. Studying the association between capital and risk offers insights into how banks manage and reduce different risks, helping to develop efficient risk management strategies. After studying this relationship banks can also optimize their capital allocation strategies and can shed a light on how capital can affect the lending power and credit availability to boost the finance in industries and thus contribute to economic growth.