Bank Capital, Risk and Profitability: A Comparative Study of Europe and Mena Countries

Abstract:

The purpose of this paper is to investigate the role of capital regulations in relation to bank risk and profitability across two different regions i.e. Europe and the Middle East and North Africa (MENA). The sample for this study includes annual data of 502 banks from European and MENA banking sectors for the period 2010-2019. The study employs OLS regression to ascertain whether Basel and non-Basel based capital ratios affect bank risk and profitability across different economic regions. The study also used Generalized Method of Moments and Limited Information Maximum Likelihood to remove the issue of possible endogeneity problems. The results show bank capital ratios comprises of risk-weighted assets are more effective in minimizing credit default risk and increasing profitability of banks in the European and MENA regions. Moreover, findings imply that complying with Basel capital guidelines do not penalize bank activities in one region compared to another. Overall results imply that bank regulators in both regions should make policies in compliance with Basel (III) capital guidelines to achieve financial stability.