Impact of capital adequacy requirements on firm performance: insights from Ethiopia

Tanzania has undergone various amendments in capital adequacy regulations and policies at various time periods, such as in 1998, 2008, and 2014. However, despite these reviews, some banks have shown good performance while others have collapsed and merged with other strong banks. This study, therefore, aimed at assessing the influence of reviews of capital adequacy requirements on the financial performance of commercial banks in Tanzania. To achieve the main objective, the study specifically intended to analyse the extent to which commercial banks in Tanzania complied with capital adequacy requirements amendments, and compare the effect of capital adequacy requirements reviews on the financial performance of commercial banks in Tanzania before and after regulatory reviews. Panel secondary data were collected for only 24 sampled commercial banks out of 36 targeted banks. Data obtained from the study were descriptively analysed and inferentially using a random effect regression model. Results from the field reveal that, after regulatory amendments on capital requirements in 2014, Tier I, Tier II, GDP, and SIZE were observed to have a higher significant influence on the financial performance (ROE and saving mobilisation) of selected banks in Tanzania as compared to the period before capital requirements reviews. The study concludes that high compliance with capital adequacy requirements helps banks to improve their financial performance. Therefore, the study recommends that banks should further diversify their income sources to ensure that they hold more capital adequacy.

Purpose:The purpose of the study was toassess the effects of Basel III framework on capital adequacy requirement in commercial banks in Kenya. The study sought to address the following research questions: why are capital adequacy regulations important in commercial banks in Kenya? What challenges are commercial banks facing in the implementation of capital adequacy requirement? What measures have commercial banks taken to ensure compliance with the capital adequacy requirement?Methodology:A descriptive survey design was applied to a population of 43 commercial banks operating in Kenya. The target population composed of the 159 management staff currently employed at the head offices of the various commercial banks in Kenya. The population was composed of Senior, Middle and Junior or Entry level Management staff. A sample of 30% was selected from within each group.Primary data was gathered using questionnaires which were dropped off at the bank’s head offices and picked up later when the respondents had filled the questionnaires. Descriptive analysis was used to analyze quantitative data while content analysis was used to analyze qualitative data.Results:The findings show that capital adequacy requirement is important in commercial banks because it leads financial stability in the Kenyan economy, improves credit risk management techniques as poor credit risk management requires more capital and leads to reduced vulnerability to liquidity shocks due to the sound capitalization policies being implemented under the Basel III framework. Findings also revealed that capital adequacy affected the balance sheet structure of the commercial banks in Kenya.Unique contribution to theory, practice and policy: The study recommends that banks should continue the pursuit of various strategies to ensure that they are in compliance with Basel III requirements and the Central Bank of Kenya’s Prudential Guidelines. The staff of this committee should be drawn from mainly the finance, legal, compliance and treasury departments. Compliance with the capital requirements will lead to a safety net for all commercial banks as the additional capital will act as a cushion that absorbs losses in case of distress in the commercial banking sector.

Can International Capital Standards Strengthen Banks In Emerging Markets?

Barriers to entry prevent new market entrants from entering markets while protecting incumbent firms. Previous researches indicate that there is relationship between barriers and firm performance. Most of the previous studies are broad and explain barriers and firm performance relationship in generic terms. This research examines the interrelationships of barriers to market entry, capital requirements, business environment, competitive advantage of incumbent firms, and firm competence on firm performance. Interaction effects among barriers to entry on firm performance have not been studied before. The study utilises the 'resource based view' as a theoretical framework in support of hypotheses. The study supports the higher-order quadratic interaction effects of: 1) a strong positive effect of competitive advantage and capital requirements on firm performance; 2) a moderate negative effect of business environment and capital requirements on firm performance.

Barriers to entry prevent new market entrants from entering markets while protecting incumbent firms. Previous researches indicate that there is relationship between barriers and firm performance. Most of the previous studies are broad and explain barriers and firm performance relationship in generic terms. This research examines the interrelationships of barriers to market entry, capital requirements, business environment, competitive advantage of incumbent firms, and firm competence on firm performance. Interaction effects among barriers to entry on firm performance have not been studied before. The study utilises the 'resource based view' as a theoretical framework in support of hypotheses. The study supports the higher-order quadratic interaction effects of: 1) a strong positive effect of competitive advantage and capital requirements on firm performance; 2) a moderate negative effect of business environment and capital requirements on firm performance.

This paper argues that the structure of corporate ownership varies systematically in ways that are consistent with value maximization. Among the variables that are empirically significant in explaining the variation in ownership structure for 511 U.S. corporations are firm size, instability of profit rate, whether or not the firm is a regulated utility or financial institution, and whether or not the firm is in the mass media or sports industry. Doubt is cast on the Berle-Means thesis, as no significant relationship is found between ownership concentration and accounting profit rates for this set of firms.

The European Banking Package II finalises the implementation of the final Basel III standards, which the industry refers to as ‘Basel IV’. It entails many changes to the methods used to determine capital requirements and represents a significant challenge for the European banking sector. Based on the Capital Requirements Regulation (CRR) III draft, this paper provides an overview of the main implementation issues in the European Union, discusses the potential impact on banks' capital requirements and makes policy recommendations. This paper uses primary sources such as the Basel Committee on Banking Supervision, the European Banking Authority and the European Commission. Secondary sources, academic articles or analyses from various stakeholders are also included in the analysis. This paper also provides an analysis of the impact of the new prudential regulations on banks based on 30 detailed Basel IV impact studies conducted over the past two years in consulting projects with banks from almost all EU countries. The impact analysis covers a wide range of different business models, bank sizes and countries. We believe the anonymised data we use is far more representative of the EU banking system and other jurisdictions than the impact studies performed by the European Commission or the BCBS. The new CRR III regulations will pose strategic, operational and regulatory challenges for the banks concerned. The paper concludes that the European implementation of the reforms will not burden a specific group of banks, but banks with different business models and of different size will be impacted differently but still significantly. This makes Basel IV and CRR III unique compared to previous reforms of the Basel framework. The EU Commission's goal of proportionality of regulations will not provide much relief in this regard. The paper provides an up-to-date and comprehensive overview of the planned changes in CRR III, ie in capital adequacy requirements. It analyses the implementation of the standards and compares them with the Basel IV requirements. Recommendations for supervisors, risk management practitioners and other interested parties conclude the paper.

This chapter addresses how prudential regulation requirements apply on a group basis. Capital adequacy requirements form the core of most prudential regulatory regimes. In essence, each prudential regime seeks to apply the relevant capital requirements to the group as a whole, whilst solving problems such as excessive leverage and double or multiple gearing. The imposition of such group requirements, in effect, raises the bar for capital requirements across the group: meaning that lightly capitalized group entities are, on a group basis, capitalized on the same basis as their more highly regulated trigger entity affiliates. There are various different approaches to applying capital adequacy requirements on a group basis. In very general terms, such approaches include variations of a consolidation approach or a deduction and aggregation approach, or a combination of both. Each approach seeks to assess capital requirements on the basis of the group as a whole and to ensure that such requirements are met with group capital resources.

This chapter addresses how prudential regulation requirements apply on a group basis. Capital adequacy requirements form the core of most prudential regulatory regimes. In essence, each prudential regime seeks to apply the relevant capital requirements to the group as a whole, whilst solving problems such as excessive leverage and double or multiple gearing. The imposition of such group requirements, in effect, raises the bar for capital requirements across the group: meaning that lightly capitalized group entities are, on a group basis, capitalized on the same basis as their more highly regulated trigger entity affiliates. There are various different approaches to applying capital adequacy requirements on a group basis. In very general terms, such approaches include variations of a consolidation approach or a deduction and aggregation approach, or a combination of both. Each approach seeks to assess capital requirements on the basis of the group as a whole and to ensure that such requirements are met with group capital resources.

This paper examines the long run interaction among deposit insurance, bank deposit rates and capital adequacy requirements. Using analysis similar to the price discrimination model of Lott and Roberts (1991) we find that a competitive environment among banks would link the spread between insured and uninsured deposit rates to the size of the insurance premium. We also find that banks that choose to operate at the regulatory minimum capital level, would increase asset risk with increased capital requirements if (1) the implicit interest paid to insured and uninsured depositors is equally sensitive to changes in risk and capital adequacy and (2) the insurance premium is independent of the level of risk and capital adequacy. Under the present risk‐based premium structure, asset risk has the potential to decline when the regulatory agency raises capital requirements. Finally, we examine the time series behavior of insured and uninsured interest rates to see if it is consistent with our theoretical model. We find that insured and uninsured rates, along with deposit insurance premiums, are cointegrated series as suggested by our model.

This paper examines banks' choice between fair-value and historical-cost accounting when reported accounting information is used in capital requirement regulation. We center our analysis on a key difference between fair-value and historical-cost accounting: the frequency with which asset value changes are reported. We show that the elasticity of banks' loan returns to aggregate lending is a critical determinant of the interaction between capital adequacy requirements and accounting choices. If lending returns are inelastic, then higher capital requirements reduce fair-value usage. By contrast, higher capital requirements encourage fair value if capital requirements are low and lending returns are sufficiently elastic. In equilibrium, banks may elect different accounting choices, and we find that mandating uniform adoption of historical cost (fair value) is desirable when capital requirements are loose (tight). Our study offers many other implications about fundamental links between accounting and prudential choices.

This research examines the relationships among the barriers to market entry: capital requirements; competitive advantage of incumbent firms; business environment; and firm competence, and their relationship to firm performance. Through a mail survey, data were collected on a sample of 190 companies. A hierarchical regression analysis enabled the assessment of the relationships among barriers to entry and firm performance. In addition, the paper examines the quadratic function of second degree among the variables to see the curvilinear relationships between independent and dependent variables. The results indicate the presence of curvilinear relationships between some barriers for market entrants and performance of market entrants. While the examination of linear relationships between barriers and firm performance is important, the analyses of curvilinear relationships shed more light into our understanding of barriers and performance. Therefore this study contributes to the literature by highlighting the importance of U-shaped and inverted curvilinear relationships between barriers to entry and firm performance.

Do New Capital Requirements Make Loans More Expensive? An Empirical Study for the Colombian Banking System

Does Basel Save Our Banks? The Effect of Basel I Capital Requirements on Bank Failures

Central bankers and financial supervisors often have different goals. While monetary policymakers want to ensure that there are always sufficient lending activities to maintain high and stable economic growth, supervisors work to limit banks. lending capacities in order to prevent excessive risk-taking. To avoid working at cross-purposes, central bankers need to adopt a policy strategy that accounts for the impact of capital adequacy requirements. In this paper we derive an optimal monetary policy that reinforces prudential capital requirements at the same time that it stabilizes aggregate economic activity. We go on to show that policymakers at the Federal Reserve adjust interest rate policy in a way that would neutralize the procyclical impact of bank capital requirements. By contrast, central bankers in Germany and Japan clearly do not act as the theory suggests they should.