Profitability, capital, and risk in US commercial and savings banks: Re-examination of estimation methods

Jacob Paroush; Ben Z. Schreiber

doi:10.1016/j.qref.2018.12.007

Profitability, capital, and risk in US commercial and savings banks: Re-examination of estimation methods

Jacob Paroush, Ben Z. Schreiber

Bank of Israel

Research output: Contribution to journal › Article › peer-review

8 Scopus citations

Abstract

This study compares the relationships between the three main bank variables i.e., profitability, capital, and risk of US commercial and savings banks for the period 1995Q1-2015Q4. As the literature analyzes the relationship between these variables in pairs, thus suffering from an 'omitted variable bias' and a 'simultaneous equations bias', we examine whether these biases are statistically significant. We compare the common methodology of a three two-equation system with both a three-equation system and three separate OLS regressions. While there are significant differences in the coefficients of the three main variables within the sample period, we could not find substantial differences in out-of-sample forecast estimates.

Original language	English
Pages (from-to)	148-162
Number of pages	15
Journal	Quarterly Review of Economics and Finance
Volume	74
DOIs	https://doi.org/10.1016/j.qref.2018.12.007
State	Published - Nov 2019

Bibliographical note

Publisher Copyright:
© 2019 Board of Trustees of the University of Illinois

Funding

We thank A. Berger, E. Elyasiani, Y. Landskroner, D. Galai, A. Milne, B. Candelon, and the participants of seminars at the Bank of Israel and Bar Ilan University for helpful comments. We also acknowledge The Aharon Meir Center for Banking of the Department of Economics at Bar-Ilan University for financial support and A. Weingarten for technical assistance. We thank A. Berger, E. Elyasiani, Y. Landskroner, D. Galai, A. Milne, B. Candelon, and the participants of seminars at the Bank of Israel and Bar Ilan University for helpful comments. We also acknowledge The Aharon Meir Center for Banking of the Department of Economics at Bar-Ilan University for financial support and A. Weingarten for technical assistance.

Funders	Funder number
Bar Ilan University
Department of Economics at Bar-Ilan University

Keywords

Capital
Commercial banks
Omitted variable bias
Profitability
Risk
Savings banks
Simultaneous equations bias

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10.1016/j.qref.2018.12.007

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abstract = "This study compares the relationships between the three main bank variables i.e., profitability, capital, and risk of US commercial and savings banks for the period 1995Q1-2015Q4. As the literature analyzes the relationship between these variables in pairs, thus suffering from an 'omitted variable bias' and a 'simultaneous equations bias', we examine whether these biases are statistically significant. We compare the common methodology of a three two-equation system with both a three-equation system and three separate OLS regressions. While there are significant differences in the coefficients of the three main variables within the sample period, we could not find substantial differences in out-of-sample forecast estimates.",

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AB - This study compares the relationships between the three main bank variables i.e., profitability, capital, and risk of US commercial and savings banks for the period 1995Q1-2015Q4. As the literature analyzes the relationship between these variables in pairs, thus suffering from an 'omitted variable bias' and a 'simultaneous equations bias', we examine whether these biases are statistically significant. We compare the common methodology of a three two-equation system with both a three-equation system and three separate OLS regressions. While there are significant differences in the coefficients of the three main variables within the sample period, we could not find substantial differences in out-of-sample forecast estimates.

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KW - Simultaneous equations bias

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Profitability, capital, and risk in US commercial and savings banks: Re-examination of estimation methods

Abstract

Bibliographical note

Funding

Keywords

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