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Determinants of banks' profitability: Do Basel III liquidity and capital ratios matter?

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  • Pierre Durand

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this paper, we investigate the role played by the TCR and LCR among determinants of banks' profitability. To this end, using Random Forest regressions and a large dataset of banks' balance sheet variables, we assess the impact and predicting power of Basel III capital and liquidity ratios. Our results confirm the trade-off theory of the capital structure: banks have an optimal capital ratio below which the relation between capital and profitability is positive. On average, this optimum falls between 15% and 20%. Furthermore, we show that LCR has a positive, but weak, effect on profitability. Overall, our findings illustrate the fact that regulatory ratios do not constitute binding conditions for banks' performance.

Suggested Citation

  • Pierre Durand, 2019. "Determinants of banks' profitability: Do Basel III liquidity and capital ratios matter?," Working Papers hal-04141855, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141855
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141855
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