The Relationship between Bank Capital, Risk-Taking and Profitability: Fresh Evidence from Panel Quantile Approach

Abstract

This study aims to reveal the relationship between bank capital (BC), risk-taking, and profitability for commercial banks in Turkey using panel quantile regression models (QRPD) with non-additive fixed effects (NAFE). Accordingly, we consider the data of 18 commercial banks for 2012-2022. Firstly, we concluded a positive relationship between banks' risk-based capital (RBC) and traditional capital ratios (CR) and return on assets (ROA); in contrast there is a negative relationship between RBC and risk-weighted assets (RWATA) under all market conditions. Secondly, we found a positive relationship between the RBC and the provision for loan losses ratio (LLPTA) in other periods except for the contraction period; at the same time, there is a positive relationship between CR and LLPTA in other periods except for the expansion period. The findings also showed an inverted U-shaped relationship between RBC and the LLPTA and return on equity (ROE) and an N-shaped relationship between CR and ROE. Lastly, we discovered a positive relationship between RWATA and ROA and ROE in all market conditions, whereas a negative relationship exists between LLPTA and ROA. The findings provide valuable insights into the validity of the moral hazard and cost-skimping hypotheses, regulatory assumptions, agency, portfolio and risk-bearing profit theories in the commercial banking sector, and that risk, capital and profitability indicators are leading factors in banks' stability.