Abstract
Increased competition and problem loan in the banking sectors force banks to operate its activities more efficiently. However, bank’s efficiency, capital and risk are interrelated. The present study is made on assessing the inter-temporal relationship between efficiency, capital and risk of commercial banks in Bangladesh during the period 2011-2016 by setting simultaneous equation. The study uses three-stage least square model (3SLS) and dynamic panel generalized method of moments (GMM) model to estimate efficiency-capital-risk relationship. The study reports that both models provide consistent result regarding the relationship of bank’s operational efficiency with capital and risk and inconsistent result about the relationship between capital and risk. The study concludes that a U-shaped relationship is exited in the 3SLS model of efficiency-capital-risk relationship as banks’ operational efficiency and risk have positive relationship with capital and bank size, indicating that with increased capital and bank size, bank’s operational efficiency is improved at decreasing rate due to increase in bank’s risk.
Highlights
As monetary institution, banking system dominates a country’s economic growth largely due to enjoy monopoly position in the financial market
Regulatory body of the banks needs to focus on capital requirement and proper supervision to identify the possible incentives of taking higher risks (Mosko & Bozdo, 2015)
The average value of loan loss provision to total loans (LLPTL) is 1.1026% which reports that the selected commercial banks keep a significant portion of income as provision to handle credit risk
Summary
As monetary institution, banking system dominates a country’s economic growth largely due to enjoy monopoly position in the financial market. A country’s economic growth and efficiency is being hindered because of the bank’s increasing problem loans as the resources are locked up in unprofitable sectors. For this reason, the operations of the banking system are needed to be efficient to ensure economic sustainability. Increased competition influences greater risk-taking behavior and reduces the market power and charter value of the bank. (Salas & Saurina, 2003; Hellmann et al, 2000) In this regard, regulatory body of the banks needs to focus on capital requirement and proper supervision to identify the possible incentives of taking higher risks (Mosko & Bozdo, 2015)
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