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This study examines the moderating effect of bank capitalization on the relationship between economic freedom and banking performance, offering comparative evidence from both advanced and emerging economies. Using an unbalanced panel of 213 countries from 1993 to 2018, this study applies a two-step System Generalized Method of Moments approach to address dynamic effects, endogeneity, and unobserved heterogeneity. The results show that economic freedom exerts a negative and significant impact on bank profitability (ROA and ROE), particularly in emerging markets with weaker institutional safeguards. Strong internal capital buffers, on the other hand, mitigate these adverse effects and enhance resilience, supporting stable profitability under liberalized conditions. Regulatory capital shows a less consistent and sometimes restrictive role. Disaggregated results indicate that equity buffers most effectively cushion the risks of financial and investment freedom, whereas trade freedom is less sensitive to capital levels. The findings emphasize that successful liberalization depends on institutional capacity and capitalization strength, highlighting the importance of tailored prudential frameworks. The study contributes to debates on financial liberalization, Basel III, macroprudential regulation, and bank risk management, underscoring that a “one-size-fits-all” liberalization strategy may undermine stability and efficiency unless supported by robust capital buffers.

In this study, we examine whether and how banks employ dividend payout policies in response to the risk of stock price crashes. Using a sample of U.S. banks, we find that banks increase their dividend payouts when faced with a higher risk of stock price crashes. In addition, we find that well-capitalized banks tend to pay more dividends when the risk of a stock price crash is elevated. This aligns with the regulatory pressure theory that banks distribute dividends when they have sufficient capital that meets or exceeds the regulatory standards. This is also in line with the signaling theory that dividend payments reflect a bank’s confidence in its financial health. Furthermore, we find that financially opaque banks tend to make more dividend payments when they are at a higher risk of stock price crashes. This supports the agency cost theory, suggesting that dividends counterbalance the need to monitor bank managers in less transparent reporting environments.

This study investigates the nonlinear relationship between bank concentration (market share) and stability (Z-score) across various bank capitalization levels (capital adequacy ratio) in Euro Area countries (2009-2019). Using a panel smoothing transition regression model, the study finds that the concentration-stability relationship is statistically insignificant when bank capitalization is low. However, the concentration-stability paradigm is confirmed when capitalization surpasses minimum regulatory requirements. Strengthening bank capitalization is crucial for enhancing stability, as higher capitalization allows banks to withstand economic shocks better.

This paper examines performance outcomes of capitalization in the European bank market. Using a European sample with 2,504 firm-year observations for the years 1992–2012, the authors analyze the effect of capitalization as used by the financial regulators on bank risk and bank profitability with alternative accounting- and market-based measures. All accounting-based measures consistently show that higher capitalization reduces bank risk and is associated with increased profitability. Contrary to this, market-based risk measures show higher bank risk implying possibly different risk assessment by capital market participants. Our results are corroborated by an ex post analysis of bank performance in times of crisis. Higher capitalized banks have fared better after the crisis in respect of profitability and risk.

This study examines the impact of financial development on bank risk-taking, measured as bank capitalization and bank income diversification. We observe the relationship using annual bank-level data from countries with dual-banking systems. The dataset spans from 2000 to 2014. Our results suggest that the impact of financial development on bank capitalization is heterogeneous across Islamic and conventional commercial banks. Moreover, the effect is different across listed and unlisted banks. However, on average, the response of income diversification to financial development is similar across most specifications. Additionally, bank risk is found to be countercyclical, suggesting that bank risk increases in good times. On average, these results (countercyclical evidence) hold across bank types (Islamic and conventional) and ownership structure (listed and unlisted). However, these results are contingent on the size (small vs. large) factor. The results are robust to alternative proxies of financial development.

This paper presents a novel approach to measure efficiency and productivity decomposition in the banking systems of emerging economies with a special focus on the role of equity capital. We model the requirement to hold levels of a fixed input, i.e. equity, above the long run equilibrium level or, alternatively, to achieve a target equity-asset ratio. To capture the effect of this under-leveraging, we allow the banking system to operate in an uneconomic region of the technology. Productivity decomposition is developed to include exogenous factors such as policy constraints. We use a panel data set of banks in emerging economies during the financial upheaval period of 2005–2008 to analyse these ideas. Results indicate the importance of the capital constraint in the decomposition of productivity.

This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk and to a lesser extent, by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, better capitalized and less leveraged banks have outperformed their peers, a finding that supports policymakers' efforts to strengthen bank capitalization.

Over the past decade policy makers in Latin America have adopted a number of macroprudential instruments to manage the procyclicality of bank credit dynamics to the private sector and contain systemic risk. Reserve requirements, in particular, have been actively employed. Despite their widespread use, little is known about their effectiveness and how they interact with monetary policy. In this paper, we examine the role of reserve requirements and other macroprudential instruments and report new cross-country evidence on how they influence real private bank credit growth. Our results show that these instruments have a moderate and transitory effect and play a complementary role to monetary policy.

We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EMs) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization, and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.