Do Human Capital and Cost Efficiency Affect Risk and Capital of Commercial Banks? An Empirical Study of a Developing Country

Abstract

Article History JEL Classification:C2, G17, D22, G28, F20.As a striking force and operational optimization, human capital and cost efficiency of commercial banks are worth considering factors in decision making. Using simultaneous equation models this study delves the interrelationship between bank risk, capital and efficiency of a sample developing country-Bangladesh incorporating new dimension human capital efficiency along with existing cost efficiency through Stochastic Frontier Analysis (SFA). The empirical results of generalized methods of moments estimator (GMM estimator) from 2000-2015 show that capitalized commercial banks are more capable of absorbing risk and enhancing human capital efficiency. Increasing amount of risk leads banks to improve their level of capital but that reduces the cost efficiency of banks. We also find the significant impact of risk and capital on the efficiency of banks. With the increase of capital and risk, the human capital of banks behaves more efficiently whereas the efficiency of cost reduces substantially. Although no significant relationship observed between risk and human capital efficiency in risk equation, the inefficiency of cost find inversely associated with risk and positively associated with capital in risk and capital equations respectively. Contribution/ Originality: This study originates new estimation of technical efficiency named Human capital efficiency along with existing cost efficiency using Stochastic Frontier Analysis to examine the simultaneous relationship between risk, capital, and efficiency of a sample Asian country Bangladesh.

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Impact of Financial Crisis on Credit Risk: Pre- and Post-financial Crises in an Emerging Economy

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Relationship among cost of financial intermediation, risk, and efficiency: Empirical evidence from Bangladeshi commercial banks

“…Inspiring from the study of A. Kasman and Carvallo (2014), Gupta and Moudud-Ul-Huq (2020), and Zheng et al (2018a), we also use Cost efficiency measure through Stochastic Frontier Analysis (SFA) to represent the efficiency of banks. Using the Software FRONTIER version 4.1 from banks level data, we measure the efficiency cost.…”

“…The simultaneous equations are drawn to judge the "back and forth" causation of variables applies. System GMM suggested by Arellano and Bover (1995) and Blundell and Bond (2000), is applied for our dynamic panel data to address the endogeneity and unobserved heteroskedasticity and autocorrelation problems of the model (Baselga-Pascual et al, 2018;Gupta & Moudud-Ul-Huq, 2020;Moudud-Ul-Huq et al, 2018;Zheng et al, 2018a). The empirical model of the study is structured as follows:…”

“…However, a growing number of banks enhance the competition that force banks to ensure their efficiency. Numerous studies (Gupta & Moudud-Ul-Huq, 2020;Zheng et al, 2018a) show that the banks' continuous regulatory pressure to control risk for keeping consistent growth is the prime concern of regulators and other stakeholders. Risk and efficiency are a longdebated issue in literature with bidirectional relationship examination (Zheng et al, 2017a(Zheng et al, , 2018b.…”