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

Abstract

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.