The Impact of Credit Risk on Profitability of Commercial Banks

This paper examines the relationship between credit risk and profitability of UScommercial banks. We use Capital Adequacy Ratio and Non-performing Loan Ratio tomeasure credit risk and Return on Equity and Return on Assets to measure profitability ofcommercial banks. Using a sample of 83 US commercial banks for the period fromDecember 2010 to December 2017, we estimate OLS regressions and find that credit riskhas an important effect on profitability. Our results show that 1% increase in NPL decreasesROA by 0.0881% and decreases ROE by 0.141%. Our findings have importantimplications for bank regulators and policy makers.