Financial Crisis and Capital Adequacy Ratio: A Case Study for Cypriot Commercial Banks

This empirical study analyses the determinants of capital adequacy of Cypriot banks mainly during the period of financial crisis using multiple linear regression. Specifically, the study focuses on certain features of banks (risk, liquidity, return etc.) to determine whether they affect the volatility of capital adequacy. The study provides supportive evidence that there is a negative statistically significant relationship regarding banksize and risk and a positive regarding the level of provisions and percentage of Net Interest Margin. The factors affecting the capital adequacy ratio in Cyprus are the increases in credit risk and nonperforming loans, excessive leverage, increased requirements by regulatory authorities for the implementation and fulfillment of the Basel III rules by 2019, the negative environment and lack of trust, intensive competition among banks, the small size of banks in comparison with the interbank market, low yield and target for long-term growth, poor corporate governance and the problem of information asymmetry. Moreover, in the case of Cyprus, the additional capital is a strategic hedge to secure access to deposits and money markets and “buffer†as insurance in case of unforeseen events in the future due to the previous negative experience.JEL classification numbers: F15, F34, G21Keywords: Capital Adequacy Ratio (CAR), Commercial banks, Liquidity, Basel, Return