A comparative analysis of the relationship among capital, risk and efficiency in the Eurozone and the U.S. banking institutions

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Abstract

In this paper, we investigate the relationship among capital, risk and efficiency in Eurozone and the U.S. banking institutions. We also assess the determinants of bank capital, risk and efficiency providing evidence of how the interrelationship and the managerial behaviors vary per type of bank (retail, commercial and investment banks). Concerning the methodology, we employ the input-oriented CCR model of data envelopment analysis developed by Charnes, Cooper, and Rhodes (1978) to estimate efficiency. We also apply the Z-score to calculate bank risk and the ratio of the value of total equity to total assets as an indicator of bank capital. Moreover, the relationship among capital, risk and efficiency of banking institutions is investigated by employing the three-stage least squares (3SLS) model, developed by Zellner and Theil (1962). Our main findings indicate that risk and capital are positively linked in the U.S. and Eurozone banks. The findings also suggest that efficiency has a negative and significant effect on bank risk in the majority of the banks of our sample. Additionally, we may conclude that the impact of risk and capital on efficiency levels is sensitive to the type of bank. As regards the effect of the variable efficiency on capital, the results are negative for all the banks in our sample.

Keywords: Bank, Capital, Risk, Efficiency, Three-Stage Least Squares

Authors’ individual contribution: Conceptualization – D.L.K. and S.P.; Methodology – D.L.K.; Formal Analysis – D.L.K.; Investigation – D.L.K. and S.P.; Writing – Original Draft – D.K.; Writing – Review & Editing – S.P.; Supervision – S.P.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G01, G21, G40

Received: 23.03.2020
Accepted: 07.05.2020
Published online: 13.05.2020

How to cite this paper: Kolia, D. L., & Papadopoulos, S. (2020). A comparative analysis of the relationship among capital, risk and efficiency in the Eurozone and the U.S. banking institutions. Risk Governance and Control: Financial Markets & Institutions, 10(2), 8-20. https://doi.org/10.22495/rgcv10i2p1