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.