Bank capital and risk in emerging banking of Jordan: a simultaneous approach

Abstract

Financial risk has received increasing attention from policymakers and financial institutions. Therefore, the present study examines the relationship between capital and risk for Jordanian banks by using data from 2010–2019. The study employs fixed effect, random effect, GMM, and 3SLS. Our findings show that the capital requirement regulation has a positive impact on capital and risk rates. Moreover, the study also concludes that Jordanian banks hold more than the minimum regulatory capital requirements laid down by Basel II, III, and the CBJ. The banking sector increases its capital adequacy by raising its liquidity and reducing its tendency to take risks. Our results indicate a highly significant negative relationship between Jordanian commercial bank capital and risk. Liquidity risk, ROA and stock market capitalization are positively related to bank capital. The results of the study suggest that Jordanian banks should be involved in higher-risk lending actions and help increase competition in the banking sector.

Impact Statement

The banking sector plays a vital role in economic growth and bank capital serves as a buffer at the time of economic shock. Similarly, risk management is also crucial for the sustainable financial sector and economic development. Thus, this study employs a simultaneous approach in developing a relationship between bank capital and risk in the Jordanian banking sector. Our findings show that the capital requirement regulation has a positive impact on capital and risk rates. Our results also indicate a highly significant negative relationship between Jordanian commercial bank capital and risk. Studying the association between capital and risk offers insights into how banks manage and reduce different risks, helping to develop efficient risk management strategies. After studying this relationship banks can also optimize their capital allocation strategies and can shed a light on how capital can affect the lending power and credit availability to boost the finance in industries and thus contribute to economic growth.

Keywords:

• Capital requirements
• risk-taking behaviour
• capital regulations
• Jordan

REVIEWING EDITOR:

• David McMillan, University of Stirling, Stirling, UK

SUBJECTS:

• Economics
• Finance
• Business, Management and Accounting

JEL CLASSIFICATION:

• G21
• G32
• G33

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Data used in this research will be available on request. Readers can request for data on following email after publication of paper.

Notes

1 https://www.cbj.gov.jo/EchoBusV3.0/SystemAssets/1a927c6c-b2a8-42db-b6a3-b6640d4d150c.pdf.

Additional information

Funding

The authors would like to thank Prince Sultan University, Riyadh, Saudi Arabia for their support.

Notes on contributors

Nusiebeh Nahar Falah Alrwashdeh

Dr. Nusiebeh Nahar Falah Alrwashdeh is currently working as a senior Lecturer at Cardiff Metropolitan University. She has done PhD in Economics and Finance from University of Portsmouth. Her interests are. Financial Sector, Banking Industry performance, Insurance Companies performance. Green Financing. She is also holding professional qualification in finance from Chartered Institute of Securities and Investment (CISI-UK) and currently Associate Fellow Member of CISI (UK).

Umara Noreen

Dr. Umara Noreen is working as an Assistant Professor at Finance Department, Prince Sultan University Riyadh, Saudi Arabia. She completed her PhD from Foundation University Islamabad, Pakistan in 2010. Her area of specialization is finance. She has an extensive teaching experience of 24 years at undergraduate, graduate and post graduate levels. She has 26 refereed and indexed Journal publications, 15 conference proceedings and a published book to her credit. She is a professional ISO certified trainer for the USAID program, with Asia Foundation, Islamabad Pakistan. She has also developed training manual for non-profit organizations under The Asia Foundation USAID project at CIIT. She has delivered five rounds of trainings to executives and senior level management of under this program. She has delivered a training program to the executives of Riyadh Bank, Saudi Arabia and training under Elite Monsha’t PSU program to entrepreneurs held at Prince Sultan University, Saudi Arabia.

Muhammad Hassan Danish

Dr. Muhammad Hassan Danish is an Assistant Professor of Economics at University of Management and Technology, Lahore-Pakistan. His research expertise’s comprises in the diversified field of social sciences with the mainly focus on primary data research. His work includes economics of happiness, public policy analysis and from the field of development on households and industrial economics. His expertise is micro and survey data analysis, public and social policy, econometric modelling, and microeconomic theory. Moreover, Dr Hassan streamlined the area of research with sustainable development goals of UNDP. He explores the current and more relevant issues in the research area to provide a way forward in achieving SDGs. He has excellent command of econometric software’s including Stata, SPSS, Eviews and Smart PLS for data analysis especially the primary or survey data.

Rizwan Ahmed

Dr Rizwan Ahmed is a Lecturer in Finance at University of Birmingham. Before joining University of Birmingham, he gained wide-ranging teaching and research experience as a lecturer and seminar leader in Cardiff Business School, Birkbeck, University of London, University of Huddersfield, and the University of Hull. His research interests are financial economics, Banking Industry performance, Insurance Companies performance. His expertise includes panel data analysis, and survey data analysis of corporate and banking sector.