High-quality capital and financial performance: a dynamic panel analysis of Spanish systemic banks after Basel III

Purpose This study analyzes the impact of regulatory capital (Common Equity Tier 1, CET1) on bank profitability (ROA and ROE) in the three main Spanish systemic banks – Banco Santander, BBVA and CaixaBank – during the 2011–2023 period, in the context of Basel III implementation. Based on a strongly balanced panel dataset (N = 39 annual observations), it empirically investigates whether CET1 contributes to financial stability and efficiency, and whether its effect varies across institutions depending on structural characteristics and regulatory events. Design/methodology/approach The methodology combines fixed effects models, interaction models and dynamic estimators of the Generalized Method of Moments (GMM) type in both difference and system forms. Control variables include bank size (log(Size)), nominal GDP and the MRO rate of the European Central Bank. The dynamic estimations allow the model to overcome the limitations of static specifications by capturing temporal inertia and endogeneity, following the approach of Arellano and Bond (1991) and Roodman (2009). Findings The results suggest that the impact of capital on profitability is neither homogeneous nor constant. The difference GMM model provides evidence of a positive and significant effect of CET1 on ROE (ß = 0.665; p = 0.046), suggesting that capital acts as a risk buffer and improves medium-term profitability. However, the interaction models display divergent effects among banks: while Santander exhibits a strongly positive coefficient (ß = 0.87), BBVA shows a negative impact (ß = −0.47), confirming structural heterogeneity. The Chow tests support these differences (p < 0.01). Additionally, GDP has a robust procyclical effect, and bank size shows possible diseconomies of scale. Research limitations/implications This study focuses on Spanish systemic banks, providing a specific analytical context. Moreover, the dynamic methodological approach adopted opens avenues for future research to expand the sample and further explore the role of institutional heterogeneity in the capital and profitability relationship. Practical implications The findings suggest that regulatory capital should be managed as a strategic tool rather than solely as a compliance requirement. For regulators, the results support the need for more tailored supervisory approaches that account for institutional heterogeneity. For bank managers, they highlight the importance of aligning capital structures with risk profiles to enhance profitability and resilience. Originality/value This study offers a theoretical contribution by challenging the neutrality hypothesis of capital on profitability and by highlighting the need for differentiated regulatory approaches tailored to the structural characteristics of each institution. From a practical perspective, the findings support more granular supervision and the strategic use of capital as a lever for profitability. Moreover, the paper proposes a methodological roadmap for future research on financial stability that integrates institutional dynamics, the economic cycle and banking heterogeneity. Ultimately, this study addresses three critical gaps: (1) the integration of European and local supervisory frameworks (2) the validation of regulatory versus audited data and (3) the modeling of institutional heterogeneity in systemic banks under Basel III.