Bank capital and risk relationship during COVID-19: A cross-country evidence

Abstract

Purpose - This study aims to examine the relationship between bank capital and bank risk during COVID-19. Design/methodology/approach - The study covers 20 countries during the period from Q4:2018 to Q4:2020, using different measurements of risk with consideration for the interrelationship between bank risk and bank capital and the impact of COVID-19. Findings - The findings show that higher bank capital mitigates bank market risk and default risk; banks incur higher market risk during the COVID-19 period, and these risks are greater if banks have higher capital levels; and low-capitalized banks reduce risks more than well-capitalized banks, and moderately low-capitalized banks behave the most prudentially. These results are robust to different capital measures and model settings. Practical implications - The research results are important in proving the motivation and practicality of capital regulation as well as the impact of COVID-19 as an exogenous shock to the bank’s operations. Originality/value - To the best of the authors’ knowledge, this is the first study to investigate the influence of the COVID-19 pandemic on the relationship between bank capital and bank risk. In addition, while most of the studies on this nexus are based on the US data and the conclusions are inclusive; our results provide empirical cross-country evidences on the relationship between bank capital and bank risk.