The purpose of this paper is to investigate the impact of capital buffer and type of ownership on bank profitability and costs of financial intermediation. The study presents a more comprehensive understanding of how capital buffers contribute to stabilizing the banking industry and how they may be beneficial or detrimental to profitability in developing nations such as Bangladesh during financial crises. Furthermore, banks differ in their ownership structures with regard to shareholders, guidelines and operations. Consequently, the study intends to address both the consistency and recommendations in this regard by determining how these structural disparities among banks may manifest in banks’ performance. This study provides empirical data to understand Bangladesh’s banking situation and evaluate the effectiveness of policy implications in a developing nation, considering both macroeconomic and bank-specific factors.
The two-step generalized method of moments (GMM) estimation method is applied to explore the impact of capital buffer and type of ownership on profitability estimated by return on assets (ROA) and cost of financial intermediation measured by net interest margin (NIM). Other control variables that have been used to conduct the study are NLTA, leverage, bank size and risk. Two macroeconomic variables (GDP and inflation) have been included in the model to find out the overall macroeconomic impact.
The result shows that the capital buffer has no significant impact on bank profitability, although its impact on the cost of financial intermediation is statistically significant. On the contrary, all types of ownership structures have shown a significant relationship with bank profitability and financial intermediation.
The extension of this study can explore the impact of capital buffer and ownership structure on the stability of bank performance.
The findings of this study might have important implications for banking regulators and investors. The result indicates that maintaining an additional level of capital does not account for profitability. However, a well-capitalized bank might charge higher intermediation fees and register a higher interest margin because of a positive association between capital buffer and net interest margin. All types of ownership having a significant relationship with bank profitability and the cost of financial intermediation suggest that banking regulations for differently structured banks are well implemented.
This study is original in nature and includes an analysis of the banking performance of Bangladeshi Banks. The findings of this study will be beneficial to banks and policymakers.
