Bank capital and profitability:Evidence from a global sample

This study employs bank-level data for a global sample to examine the relationship between capital and profitability over 2000-2013. Our evidence suggests that bank capital is positively related to bank profitability, although the estimated impact is relatively marginal. However, more capitalised banks that are more profitable appear to have a higher traditional risk, a greater proportion of non-traditional activities in their balance sheets and they tend to be more effective at controlling their costs. The relationship depends on environmental conditions as well and bank size. It is typically stronger in crisis periods, in lower and middle income countries and for larger banks (but not for Global Systemically Important Banks, or GSIBs). Finally, for banks operating in less restricted, more unstable and corrupt environments, the same increase in capital is associated with more profitable institutions than banks operating in countries with lower corruption levels. Our findings are robust to different specifications and robustness tests, and carry important implications for policy reforms aimed at ensuring stability to the banking sector globally.