Time-varying capital ratios under CECL

Purpose: The purpose of this study is to assess whether or not working capital ratios have an impact on the profitability of selected four-wheeler automobile companies. Design/methodology/approach: To assess the working capital management ratios on profitability in selected four-wheel automobile companies, the author applied the coefficient of correlation, correlation matrix, and multiple regression analysis methodology in selected four-wheel automobile companies listed on the CMIE prowess and secondary data considered also in annual reports. Ten passenger car manufacturing companies were selected for the period between 2011–12 to 2020–21, to choose a sample from the universe for research purposes., the purposive (judgmental) selection method is preferred for secondary data. Six different working capital component ratios (current ratio (CR), liquidity ratio (LR) are moderate ratios, working capital turnover ratio (WCTR), inventory turnover ratio (ITR), receivables turnover ratio (RTR), and cash turnover ratio (CTR)) are independent ratios have been measured for their impact on profitability using the coefficient of correlation and regression. Profit before tax to asset ratio (PBT/Total assets (dependent ratio). Findings: The study found that Working capital ratios (CR, QR, WCTR, ITR, RTR, and CTR) are positively correlated with profitability ratios. Of the six working capital component ratios, five of them are significant at a 5-percentage level, except cash turnover ratios. Contribution/Originality: Managers at four-wheeler companies need to improve the efficiency and effectiveness of the firm's financial management to avoid working capital ratios that put the company in jeopardy. To help with investing decisions, it may be used as a benchmark of firms who have demonstrated strong financial success.

The study aims to determine the impact of Capital Adequacy Ratio, Credit Losses Ratio and Efficiency Ratio on the two significant profitability ratios, namely Return on Assets (ROA) and Return on Equity (ROE), during the pandemic. Panel Data Regression is used to model the effects of Capital Adequacy, Credit Losses and Efficiency Ratio on Return on Assets and Return on Equity of Indian banks. A suitable model has been developed by analyzing the results of the Hausman test and the p-values. It has been found that Capital Adequacy Ratio (CAR) with coefficient value of –0.664, CET1 with coefficient value of 1.83 and efficiency ratio with coefficient value of 1.825 have significantly affected the return on assets as their p-values are less than 0.05. However, the accepted relationship between CAR and ROA, efficiency ratio and ROA were inverse, but their coefficients were significant. The provision for credit losses (PCL) was not affecting the ROA significantly during the pandemic and hence was not considered while framing the model. Again, the dependent variable is the return on equity, except CAR. Other ratios, i.e., CET1, efficiency ratio, and PCL ratio have unacceptable correlations and are even non-significant as their p-values are less than 0.05.

Risk management is a main issue on accounting research recently. This study investigates whether capital adequacy ratios (Basel regulatory capital ratio under 1998 version and traditional capital ratio on the balance sheet) can predict subsequent bank risk, and whether the regulatory risk-based capital ratio is more useful as a warning indicator for bank solvency than the traditional capital ratio in Taiwan. Considering characteristics of banking industry, this study employs an option pricing methodology to obtain implied asset risk as a market-based proxy for a bank's total risk. Empirical results indicate that both capital ratios are negatively associated with subsequent bank risk, and that the regulatory risk-based capital ratio more completely predicts bank risk than the traditional capital ratio does. In other words, the urging warning function of the risk-based capital requirement on bank risk is effective.

The Purpose of this study is to measure the impact of capital adequacy ratio i.e., core capital ratio, supplementary capital ratio, and total capital fund ratio; financial performance i.e., return on assets and return on equity as well as their relationship. It has also focused on effect of capital adequacy ratio on financial performance of commercial banks in Nepal. Descriptive and casual comparative research design has been used in this study. It is based on secondary sources of data. The data were collected from annual audit report of twenty-six commercial banks from fiscal year 2012/13 to 2018/19 out of twenty-seven. Rastriya Banijya Bank has been excluded in this study due to the unavailability of annual audit report. Total number of observations were 182. The mean range, standard deviation, coefficient of variation, correlation analysis, and regression analysis statistical tools were used in this study. This study reveals that the return on equity is highly scattered in comparison to return on equity. Supplementary capital is highly spread in comparison to core capital ratio. There is low degree of positive relationship of return on assets with core capital ratio and supplementary capital ratio. There is low degree of positive relationship of return on equity and supplementary capital however low degree of inverse relationship in between return on equity and core capital. Core capital ratio and total capital fund ratio positively influence on return on assets and return on equity.

The study focuses on credit risk management and the profitability of Nepalese commercial banks, using a sample of five banks Nepal SBI, Nabil, Sanima, NIC Asia, and Agricultural Development Bank Limited selected from 20 commercial banks. The primary aim is to analyze the impact and relationship between credit risk management and the profitability of these banks. The sample selection was based on judgment, covering 50 observations over ten years of annual financial data. A descriptive and causal-comparative research design was adopted. Statistical tools such as mean, standard deviation, and coefficient of variation were utilized, alongside inferential statistics like correlation, regression analysis, and hypothesis testing, to evaluate variables. Credit risk indicators, including the capital adequacy ratio, supplementary capital ratio, core capital ratio, non-performing loan ratio, credit deposit ratio, and cash reserve ratio, were analyzed as independent variables. Profitability measures, such as return on equity and return on assets, served as dependent variables. The study concluded that return on equity is positively related to the capital adequacy ratio and non-performing loan ratio, indicating a direct relationship. However, it is negatively associated with the supplementary capital ratio, core capital ratio, credit deposit ratio, and cash reserve ratio. Similarly, return on assets showed a positive correlation with the capital adequacy ratio, core capital ratio, non-performing loan ratio, credit deposit ratio, and cash reserve ratio, but a negative correlation with the supplementary capital ratio.

After the financial crisis financial regulators increased banks’ capital adequacy ratios (CET1/RWA) requirements in order to make the financial system more resilient. The new capital requirements could be achieved through different channels, some of which might affect bank’s ability to finance the real economy. We perform a decomposition of the changes in capital adequacy ratios into seven factors to check whether banks adjusted their capital ratio by increasing equity, by reducing loans or securities, or by reducing the riskiness of their assets’ portfolio. We employ consolidated balance sheet data of 257 European banking groups including M&A operations and state aid and covering the 2005-2014 period, and find that the main driver alters over time. Our decomposition shows that during the financial crisis the augmentation was mainly driven by new share issuances and government recapitalizations, while during the sovereign crisis a reduction in the RWA-density (RWA/TA) is found. In the post crisis period, we observe a large income effect and a reduction in total assets. Decompositions are also performed at country and major banking group level, showing high heterogeneity in responses to achieve the new requirements.

Are regulatory capital adequacy ratios good indicators of bank failure? Evidence from US banks

Sukuk market development and Islamic banks’ capital ratios

Capital and risk in commercial banking: A comparison of capital and risk-based capital ratios

This study examines the impact of liquidity and regulatory capital on the profitability of Nepalese commercial banks. Return on assets and net interest margin are the dependent variables. The selected independent variables are current ratio, investment ratio, liquidity ratio, bank size, capital ratio and capital adequacy ratio. This study is based on secondary data gathered from 20 Nepalese commercial banks with 160 observations for the period from 2011/12 to 2018/19. The data are collected from Banking and Financial Statistics published by Nepal Rastra Bank and annual reports of the Nepalese commercial banks. The regression models are estimated to test the impact of liquidity and regulatory capital on the profitability of Nepalese commercial banks. The study showed that current ratio has a positive impact on return on assets and net interest margin. It indicates that increase in current ratio leads to increase in return on assets and net interest margin. Similarly, investment ratio has a positive impact on return on assets and net interest margin. It reveals that higher the investment ratio, higher would be the return on assets and net interest margin. However, liquidity ratio has a negative impact on return on assets and net interest margin. It means that higher the liquidity ratio, lower would be the return on assets and net interest margin. Similarly, bank size has a positive impact on return on assets and net interest margin. It reveals that larger the bank size, higher would be the return on assets and net interest margin. Likewise, the study also showed that bank capital ratio has a positive impact on return on assets and net interest margin. It indicates that higher the capital ratio, higher would be the return on assets and net interest margin. Similarly, capital adequacy ratio has a positive impact on return on assets. It reveals that higher the capital adequacy ratio, higher would be the return on assets and net interest margin.

The determinants of capital ratios in Islamic banking

PurposeThis study aims to empirically investigate whether the adoption of fair‐value‐accounting decreases the relevance of banks' capital adequacy ratios (CARs) in explaining insolvency risks. Additionally, how the disclosure quality affects the superiority of fair‐value‐based CARs over cost‐based CARs is also explored.Design/methodology/approachUsing data from Taiwan banks from 2004 to 2010, the following tests are conducted. First, the insolvency risk is regressed on the reported CAR, along with the related interaction with the adoption of TFAS No. 34 to test the weakened relevance of CARs during the post‐TFAS No. 34 periods. Second, the relative relevance of fair‐value‐based CARs and cost‐based CARs is assessed using Vuong's Z‐statistic. Lastly, observations are partitioned into two groups – banks of higher and lower disclosure quality – to investigate whether fair‐value‐based CARs is superior (inferior) to cost‐based CARs for banks with higher (lower) disclosure quality.FindingsFirst, adopting TFAS No. 34 reduces the relevance of CARs in explaining banks' insolvency risks. Second, fair‐value‐based CARs are superior to cost‐based ones in relation to insolvency risks only for banks of higher disclosure quality.Originality/valueThis study is the first to fill the empirical gap by demonstrating that the ability of CARs to explain the insolvency risk is adversely influenced by the adoption of fair value accounting. In particular, the results shed some light on the move toward fair‐value accounting, and may be interpreted that adopting fair‐value reporting is not flawless, drawing attention to the potential information loss in abandoning historical‐cost‐based regimes. Moreover, because the application of fair‐value accounting in the Taiwan banking industry is fairly similar to that of international or US GAAP, these results also yield insights into other standard‐setters.

Aim - This paper investigates the Bank-particular and country-level factors of the capital adequacy ratio of conventional and Islamic banks in the MENA region in a comparative manner.Methodology -Data for all variables related to banks were collected from the Fitch database, while the data for macroeconomic was collected from the Bloomberg database, World's bank database, and Transparency International website. Control variable used to account for differences in bank characteristics and macroeconomic conditions for the MENA region countries. Descriptive analysis was used to describe data and a two regression models are applied to test a population of 334 banks (282 conventional banks and 52 Islamic banks) from 2010 to 2019 from 17 countries in the MENA region namely; Algeria, Bahrain, Morocco, Egypt, Jordan, Kuwait, Qatar, Oman, Saudi Arabia, Lebanon, Tunisia, Syria, Israel, Yemen, the United Arab Emirates, and Gaza.Results- The pooled cross- sectional regression analysis shows that for all banks in the MENA region, the liquidity, deposits, loans, corruption index, size, and GDP are negatively associated with the capital adequacy ratio. In contrast, profitability, credit risk, and governance index are associated positively with the capital adequacy ratio. Moreover, it shows a significant distinction among the capital adequacy ratio of conventional and Islamic banks across the MENA region and conventional banks hold higher capital adequacy ratios than Islamic banks. However, the panel regression findings provide evidence that the influence of the profitability and governance index factors on the capital adequacy ratio differs significantly between conventional and Islamic banks. For conventional banks, the panel data regression analysis shows that profitability and governance quality are significantly and positively correlated with the capital adequacy ratio. While, deposits, size, and loans are significantly negatively associated with the capital adequacy ratio and liquidity and credit risk do not have any significant relationship with the capital adequacy ratio. For Islamic banks, only deposits, loans, size, and GDP show a significant adverse relation with the capital adequacy ratio. This comparison study contributes to the literature by allowing regulators to see whether the factors that influence the capital adequacy ratio as defined by Basel II criteria are identical for both banking systems or whether the difference in conceptual backgrounds of both banking systems impedes adherence to the same regulation.

Abstract: Bank liquidity has become a serious concern of the government with the issuance of a regulation requiring banks in Indonesia to meet the liquidity coverage ratio (LCR). However, efforts to build liquidity resilience have resulted in banks having to make adjustments to their capital structure so that they are suspected of having an influence on their solvency. This study investigates the effect of the level of liquidity on the level of solvency of Indonesian banks, which is proxied by the level of capital ratios and debt ratios during the 2013-2019 period using banking data listed on the Indonesia Stock Exchange. The results of this study prove that the liquidity variable proxied by the loan-to-asset ratio (LAR) has a negative effect on the capital adequacy ratio (CAR) but has a positive effect on the debt-to-asset ratio (DAR). Meanwhile, the liquidity estimated by the current ratio (CR) does not affect the capital adequacy ratio (CAR) but has a negative effect on the debt-to-asset ratio (DAR).Abstrak: Aspek likuiditas bank telah menjadi perhatian serius pemerintah dengan dikeluarkannya peraturan yang mewajibkan bank di Indonesia untuk memenuhi liquidity coverage ratio (LCR). Namun upaya membentuk ketahanan likuiditas tersebut mengakibatkan bank harus melakukan penyesuaian struktur permodalannya sehingga diduga memiliki pengaruh terhadap solvabilitasnya. Penelitian ini melakukan investigasi pengaruh tingkat likuiditas terhadap tingkat solvabilitas perbankan Indonesia yang diproksikan dengan tingkat capital ratio dan debt ratio selama periode 2013-2019 dengan menggunakan data perbankan yang terdaftar di Bursa Efek Indonesia. Hasil penelitian ini membuktikan bahwa variabel likuiditas yang diproksikan dengan loan-to-asset ratio (LAR) berpengaruh negatif terhadap capital adequacy ratio (CAR) tetapi berpengaruh positif terhadap debt-to-asset ratio (DAR). Sedangkan likuiditas yang diestimasi dengan current ratio (CR) tidak berpengaruh terhadap capital adequacy ratio (CAR) tetapi berpengaruh negatif terhadap debt-to-asset ratio (DAR)

PurposeThis study aims to understand how quickly Japanese banks readjust their capital ratios (leverage, regulatory capital, tier-I capital and common equity) following an economic shock.Design/methodology/approachThis study uses a two-step system GMM framework to test the study's hypotheses using the annual data of Japanese commercial and cooperative banks ranging from 2005 to 2020.FindingsThe findings show that banks adjust their leverage ratio faster than regulatory capital, tier-I capital and common equity ratios. In addition to that, the results reveal that the speed of capital adjustment is higher for commercial banks than for cooperative banks, suggesting higher economic costs and implications for commercial banks. Furthermore, it is worth noting that well-capitalised (under-capitalised) banks tend to prioritise the adjustments to common equity (leverage) before considering the adjustments to leverage (common equity). According to the results, high-liquid (low-liquid) banks alter their regulatory capital and tier-I capital ratios (leverage) more quickly (more slowly) than low-liquid (high-liquid) banks.Practical implicationsThe findings suggest that when formulating and implementing new banking regulations, particularly in assessing and adjusting specific capital requirements under Pillar II of Basel III, management (including bankers, regulators and policymakers) should consider the heterogeneity observed in the rate of capital adjustment across various bank characteristics. Additionally, bank managers should also consider the speed of adjustment when determining optimal half-life and target capital structures.Originality/valueTo the author's knowledge, this study represents a pioneering investigation into the rate of adjustment of capital ratios (leverage, regulatory, tier-I and common equity) within Japan's banking sector. The study employs a comprehensive dataset encompassing both commercial and cooperative banks to facilitate this analysis. A notable contribution to the existing body of literature, this study offers a detailed analysis and emphasises the varying degrees of adjustment in capital ratios. The study also highlights the heterogeneous nature of the adjustment rate in these ratios by categorising the data into well-capitalised, under-capitalised, highly liquid and low-liquid banks.