TAILIEUCHUNG - Bank trading, capital, and profitability

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. | Journal of Applied Finance Banking vol. 9 no. 6 2019 279-284 ISSN 1792-6580 print version 1792-6599 online Scientific Press International Limited Bank Trading Capital and Profitability Jijun Niu1 and Victor Y. Song2 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 1. Introduction Some banks generate significant income from trading activities . Boot and Ratnovski 2016 King Massoud and Song 2016 Falato Iercosan and Zikes 2019 . In 2017 for example there were 109 US banks with assets greater than 10 billion. These banks collectively earned 25 billion of trading income which accounted for 12 of their total noninterest income3. Given the importance of trading in modern banking a question naturally arises How does trading affect overall bank profitability To answer this question we follow King Massoud and Song 2016 and measure trading as the ratio of trading assets to total assets. Analyzing a panel of US banks over the period 2010 Q1 to 2017 Q4 we find that the effect of trading on bank profitability depends on each bank s capital ratio. The effect is positive for banks with high capital ratios but 1 Beedie School of Business Simon Fraser University. 2 Beedie School of Business Simon Fraser University. 3 The numbers are obtained from the Statistics on Depository Institutions Report of the Federal Deposit Insurance Corporation. Article Info Received July 17 2019. Revised August 5 2019. Published online November 1 2019. 280 Jijun Niu and Victor Song negative

• Ngân hàng - Tín dụng
• Bank trading
• Findings provide empirical support
• Undermine bank profitability
• Reduces profitability for banks
• Bank profitability depends
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