Abstract
In 1991, the Central Bank of Egypt increased the minimum capital requirements for the banking industry vis-a-vis risk weighted assets to 8 percent, along the lines of the Basle Committee on Banking Supervision. We investigate the effects of capital regulations on cost of intermediation and profitability. A number of factors have pushed up an increase in the cost of intermediation in the post-capital regulation period: higher capital to assets ratio, an increase in banks' size and a reduction in inflation. The reduction in banks' concentration and output growth countered these effects. A number of factors contributed positively to banks' profitability in the post-regulation period: higher capital requirements, the reduction in implicit cost and the increase in banks' size. The reduction in economic activity had counter effects on bank's profitability. Overall, the results support the Central Bank's efforts to enforce capital regulations towards improving the performance of the banking sector in Egypt.
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