Impact of the Capital Adequacy on Bank Competition in the Kosovo Banking Sector

Abstract

Sustainable growth, higher competitiveness, and a stable position should be the top mission of each bank during this century. Central banks are obliged to play their role by monitoring the banks on being sound and ensuring a stable economic system, by enforcing them to keep their CAR ratios well above the minimum required level. On the other hand, banks should increase their profit and competitiveness by orienting their investment more on low-risk products. Banks with high levels of capital will tend to possess outstanding performance and promote public confidence. However, the requirement for a higher capital ratio appears to be a barrier to rising competition. According to the various studies, macroeconomic factors and bank-specific factors both had a significant impact on the bank’s capital adequacy position. This study through the statistical regression shows the impact of the Capital Adequacy Ratio on bank competition. The results we have obtained prove that the capital requirement has a positive impact on increasing bank competition. Supported by the results, we advise banks to focus their investment on the market for highly rated instruments. By doing so, they may spark the next round of competition and be able to keep their capital adequacy ratios at the highest possible level, improving the soundness and stability of their institution.