Abstract
Some banks generate significant income
from trading activities. In this paper, we analyze a panel of US banks and find
that the effect of trading on bank profitability depends on each bank’s capital
ratio. Trading enhances profitability for banks with high capital ratios, but
reduces profitability for banks with low capital ratios. Our findings provide
empirical support for theories in which trading can divert capital away from
relationship lending and undermine bank profitability.
JEL classification numbers: G21
Keywords: Bank, Trading, Capital,
Profitability