IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2304.05935.html
   My bibliography  Save this paper

Exploring the Determinants of Capital Adequacy in Commercial Banks: A Study of Bangladesh's Banking Sector

Author

Listed:
  • Md Shah Naoaj

Abstract

This study investigates the factors that influence the capital adequacy of commercial banks in Bangladesh using panel data from 28 banks over the period of 2013-2019. Three analytical methods, including the Fixed Effect model, Random Effect model, and Pooled Ordinary Least Square (POLS) method, are employed to analyze two versions of the capital adequacy ratio, namely the Capital Adequacy Ratio (CAR) and Tier 1 Capital Ratio. The study reveals that capital adequacy is significantly affected by several independent variables, with leverage and liquidity risk having a negative and positive relationship, respectively. Additionally, the study finds a positive correlation between real GDP and net profit and capital adequacy, while inflation has a negative correlation. For the Tier 1 Ratio, the study shows no significant relationship betweenleverage and liquidity risk, but a positive correlation with the number of employees, net profit, and real GDP, while a negative correlation with size and GDP deflator. Pooled OLS analysis reveals a negative correlation with leverage, size, and inflation for both CAR and Tier 1 Capital Ratio, and a positive correlation with liquidity risk, net profit, and real GDP. Based on the Hausman test, the Random Effect model is deemed moresuitable for this dataset. These findings have important implications for policymakers, investors, and bank managers in Bangladesh by providing insights into the factors that impact the capital ratios of commercial banks.

Suggested Citation

  • Md Shah Naoaj, 2023. "Exploring the Determinants of Capital Adequacy in Commercial Banks: A Study of Bangladesh's Banking Sector," Papers 2304.05935, arXiv.org.
  • Handle: RePEc:arx:papers:2304.05935
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2304.05935
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Reint Gropp & Florian Heider, 2010. "The Determinants of Bank Capital Structure," Review of Finance, European Finance Association, vol. 14(4), pages 587-622.
    2. Pham Thi Xuan Thoa & Nguyen Ngoc Anh & Nguyen Khac Minh, 2020. "The determinant of capital adequacy ratio: empirical evidence from Vietnamese banks (a panel data analysis)," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 10(1), pages 60-70.
    3. Mr. Calixte Ahokpossi & Agnes Isnawangsih & Md. Shah Naoaj & Ting Yan, 2020. "The Impact of Monetary Policy Communication in an Emerging Economy: The Case of Indonesia," IMF Working Papers 2020/109, International Monetary Fund.
    4. Ozili, Peterson K, 2015. "Determinants of Bank Profitability and Basel Capital Regulation: Empirical Evidence from Nigeria," MPRA Paper 61069, University Library of Munich, Germany.
    5. Md Shah Naoaj & Mir Md Moyazzem Hosen, 2023. "Does higher capital maintenance drive up banks cost of equity? Evidence from Bangladesh," Papers 2302.02762, arXiv.org.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Geoffrey Ngetich Iletaach & Dr. Penina Langat & Dr. Gichuki Kingori, 2024. "Assessing the Impact of Asset Quality on Financial Performance: A Study of Kenyan Deposit Taking SACCOs," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(8), pages 2479-2492, August.
    2. Marta Anita Karaś & Michał Boda, 2024. "Stabilność i wyniki finansowe banków w krajach Europy graniczących z konfliktem militarnym w Ukrainie," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 2, pages 64-111.
    3. Apanisile Temitope Samuel, 2024. "The Justification of Complex Systems Analysis in Better Informing Project Decisions: A Study of the us Surface Transportation Board," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 11(8), pages 263-280, August.
    4. Apanisile Temitope Samuel, 2024. "The Effect of Quantitative Complexity Analysis on the Resilience of Nigerian Banks. Case Study: The Four Listed Nigerian Banks on the Premium Board of the Nigerian Exchange Group (NGX) for the Year 20," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 11(7), pages 17-71, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daniel Anarfi & Danuše Nerudová, 2018. "Profit Shifting and the Tax Response of Multinational Banks in Eastern Europe," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 66(3), pages 729-736.
    2. Lepetit, Laetitia & Saghi-Zedek, Nadia & Tarazi, Amine, 2015. "Excess control rights, bank capital structure adjustments, and lending," Journal of Financial Economics, Elsevier, vol. 115(3), pages 574-591.
    3. Luca Riccetti & Alberto Russo & Mauro Gallegati, 2015. "An agent based decentralized matching macroeconomic model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 305-332, October.
    4. Janda, Karel & Kravtsov, Oleg, 2016. "Interdependencies between Leverage and Capital Ratios in the Central and Eastern European Banks," MPRA Paper 74560, University Library of Munich, Germany.
    5. Björn Imbierowicz & Axel Löffler & Ursula Vogel, 2021. "The transmission of bank capital requirements and monetary policy to bank lending in Germany," Review of International Economics, Wiley Blackwell, vol. 29(1), pages 144-164, February.
    6. Bakkar, Yassine & De Jonghe, Olivier & Tarazi, Amine, 2023. "Does banks’ systemic importance affect their capital structure and balance sheet adjustment processes?," Journal of Banking & Finance, Elsevier, vol. 151(C).
    7. Peltonen, Tuomas A. & Gross, Marco & Behn, Markus, 2016. "Assessing the costs and benefits of capital-based macroprudential policy," Working Paper Series 1935, European Central Bank.
    8. Leonardo Gambacorta & Giacomo Ricotti & Suresh Sundaresan & Zhenyu Wang, 2017. "The effects of tax on bank liability structure," Temi di discussione (Economic working papers) 1101, Bank of Italy, Economic Research and International Relations Area.
    9. Dominika Ehrenbergerová & Martin Hodula & Zuzana Gric, 2022. "Does capital-based regulation affect bank pricing policy?," Journal of Regulatory Economics, Springer, vol. 61(2), pages 135-167, April.
    10. Martynova, Natalya & Vogel, Ursula, 2022. "Banks’ complexity-risk nexus and the role of regulation," Journal of Banking & Finance, Elsevier, vol. 134(C).
    11. Albina Kalimashi & Driton Balaj, 2023. "COVID-19 Impact on the Capital Structure of Commercial Banks: Evidence from the Western Balkans," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 76-88.
    12. Alin Marius Andries & Martin Brown, 2017. "Credit booms and busts in emerging markets," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 25(3), pages 377-437, July.
    13. David E Allen & Robert John Powell, 2013. "The Determinants of Capital Structure: Empirical evidence from Thai Banks," Information Management and Business Review, AMH International, vol. 5(8), pages 401-410.
    14. Beck, Thorsten & De Jonghe, Olivier & Schepens, Glenn, 2013. "Bank competition and stability: Cross-country heterogeneity," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 218-244.
    15. Thomas Hemmelgarn & Daniel Teichmann, 2014. "Tax reforms and the capital structure of banks," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 645-693, August.
    16. Agostino Capponi & Xu Sun & David D. Yao, 2020. "A Dynamic Network Model of Interbank Lending—Systemic Risk and Liquidity Provisioning," Mathematics of Operations Research, INFORMS, vol. 45(3), pages 1127-1152, August.
    17. Fischer, Thomas & Riedler, Jesper, 2014. "Prices, debt and market structure in an agent-based model of the financial market," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 95-120.
    18. Barattieri, Alessandro & Moretti, Laura & Quadrini, Vincenzo, 2016. "Banks Interconnectivity and Leverage," Research Technical Papers 07/RT/16, Central Bank of Ireland.
    19. Peterson K. Ozili, 2017. "Bank Profitability and Capital Regulation: Evidence from Listed and non-Listed Banks in Africa," Journal of African Business, Taylor & Francis Journals, vol. 18(2), pages 143-168, April.
    20. Schroth, Josef, 2021. "Macroprudential policy with capital buffers," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 296-311.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2304.05935. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.