Is Economic Freedom a Moderator of the Relationship Between  Bank Capital and Profitability?

Abbas, Faisal; Ali, Shoaib

doi:10.47743/saeb-2022-0016

Cited by 4 publications

(1 citation statement)

References 58 publications

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“…For instance, profitable banks may lower their risk, affecting bank profitability. Therefore, to overcome all these issues/inconsistencies, we use a dynamic panel framework to deal with the issues mentioned above (Abbas and Ali, 2022b). For the empirical analysis to investigate the impact of freedom on bank risk, we used the following dynamic model:Where Yi,t and Yi,t−1 denote the current and lagged values of bank risk, respectively.…”

Section: Data and Econometric Modelmentioning

confidence: 99%

Economic freedom and banks' risk-taking in Japan: a tale of two sides

Abbas,

Ali,

Suleman

2024

JRF

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PurposeThis study examined how economic freedom and its related components, such as open markets, regulatory efficiency, rule of law and the size of government, affect bank risk behavior, focusing on the Japanese context.Design/methodology/approachThe study employs a two-step GMM framework on the annual data of Japanese banks ranging from 2005 to 2020 to empirically test the hypotheses. Furthermore, we also use the ordinary least square method to ensure the robustness of our mainline findings.FindingsThe finding suggests that economic freedom increases the banks' risk-taking, thus making them fragile. The results also highlight that out of the four main subcomponents of economic freedom, regulatory efficiency and government size increase bank risk-taking, while the rule of law and open markets decrease banks' risk-taking. Additionally, we examine how the banks' specific characteristics affect the results by creating a subsample based on capitalization and liquidity ratios. Overall, the results are consistent with the baseline findings. Moreover, the results are robust to alternative proxy measures of risk.Practical implicationsThe study's findings have several implications for regulators and policymakers. The results suggest that regulators and policymakers should reconsider their strategies for economic freedom to ensure that they promote stability in the banking system and reduce banks' risk-taking inclinations.Originality/valueAlthough previous studies have examined the impact of economic freedom on bank stability and risk-taking, this study is the first to do so in the Japanese context, contributing to the literature by providing new insights and empirical evidence.

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Section: Data and Econometric Modelmentioning

confidence: 99%

Economic freedom and banks' risk-taking in Japan: a tale of two sides

Abbas,

Ali,

Suleman

2024

JRF

Self Cite

View full text Add to dashboard Cite

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Does democracy matter in banking performance? Exploring the linkage between democracy, economic freedom and banking performance in the European Union member states

Socol,

Iuga

2023

Int. J Fin Econ

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Literature on the effects of socio‐political factors and the quality of political‐economic institutions on banking performance is scarce and mixed. To contribute to this literature, this study analyzes whether democracy and economic freedom affect the banking sector in European Union member countries. We provide empirical evidence of the influence of democracy and economic freedom on banking performance using a sample of 27 countries from 2001 to 2020, and accounting‐based return on assets (ROA) and return on equity (ROE) as performance measures. A dynamic model (system GMM) was used to address issues such as heteroscedasticity, serial correlation, and endogeneity. These findings indicate that democracy is positively associated with banking performance, whereas economic freedom negatively affects it in the sample countries. Additionally, this study adds to the growing literature on the relationship between control variables (macroeconomic determinants, bank‐specific factors, or a country's legislative regime) and banking performance. This study is practically valuable for managers, investors, stakeholders, policymakers, and academicians.

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