Journal of Applied Finance & Banking

Bank Trading, Capital, and Profitability

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• Abstract

   

  Some banks generate significant income from trading activities. In this paper, we analyze a panel of US banks and find that the effect of trading on bank profitability depends on each bank’s capital ratio. Trading enhances profitability for banks with high capital ratios, but reduces profitability for banks with low capital ratios. Our findings provide empirical support for theories in which trading can divert capital away from relationship lending and undermine bank profitability.

   

  JEL classification numbers: G21

  Keywords: Bank, Trading, Capital, Profitability