The Effect of Capital on Profitability in Nordic Banks

Abstract

This thesis explores the relationship between capital and profitability in Nordic banks. Bank capital can have either profitable or adverse effects and the Nordic countries have recently straightened their capital requirement, so therefore it’s important to see what relationship there is between their bank capital and profitability. We use four different profitability variables in order to see what measurement is appropriate for the Nordic countries. Using data from five Nordic countries and 113 banks between the years 2011-2016, we estimate our model applying the system Generalized Methods of Moments (GMM) approach in our study. We find that by increasing capital with 1 unit, the profitability measurement ROA, in the Nordic banks, will increase by 6.4 units. We further find that our profitability variables show significantly positive persistence of profit and that Commercial banks are playing a dominant role in the Nordic banking system. Further, by adding regulation and institutional factors into our model, the main result does not change, meaning, there is still the same significantly positive relationship between capital and profitability, and persistence of profit.