Bank leverage and profitability: Evidence from a sample of international banks

We examine the relationship between leverage and residual income for a sample of international banks using an unbalanced panel over the period 2005–2011. Our GMM-based econometric model considers both bank-level and country-level variables to control for several other factors aside from equity capital and allows for endogeneity and unobservable heterogeneity. We document a significant positive non-monotonic link between the capital ratio and residual income for the international banking industry. These results are robust to a number of different model specifications.