Capital Adequacy Requirements Research Articles

Capital Adequacy Ratio — a Panacea for Indian Banks during COVID-19 Pandemic

A stable financial system acts as a catalyst for the economic growth and development of a country. The healthy banking sector is the core of a sustainable economy as banks act as intermediaries between depositors and lenders of money. In the surge of the COVID-19 pandemic, the financial sector witnessed significant transitions in terms of digital transformation. In India, the banking sector has remained resilient throughout the pandemic due to government and regulators’ policy efforts and the maintenance of capital adequacy requirements. Banks have maintained higher capital buffers, better liquidity requirements, and lower leverage, cushions against pandemic shock. In the present paper, the researcher provides a conceptual elucidation of Basel norms, analyzes the component-wise Capital to Risk-Weighted Asset Ratio (CRAR) of Indian Scheduled Commercial Banks (SCBs) and examines the CRAR position of SCBs during the COVID-19 pandemic. The study also evaluated the distribution of SCBs by CRAR and examined the capital ratios of public, private, and foreign sector banks from 2016 to 2022. The ANOVA analysis output revealed a significant difference in the CRAR of public, private, and foreign banks. The study concludes that adequate CAR levels help banks mitigate the risks that arise during pandemic crises and aid them in conducting their banking operations effortlessly. Further, it concludes that public sector banks (PSBs) still lag behind their counterparts in maintaining adequate CRAR, and hence, they need to reduce the accumulation of risk-weighted assets (RWA).

The role of refundable accommodation deposits in financing aged care capital expenditure: Views from the sector

Residential aged care providers rely on refundable accommodation deposits (RADs) to finance capital expenditure, but changing consumer accommodation payment preferences may reduce their access. Our study evaluated the potential impact of a significant reduction in provider RAD balances. We surveyed 300 providers across Australia in 2020 and conducted focus groups and interviews with stakeholder executives, to develop key themes using an inductive constant comparative method couched within grounded theory. We found preferences for RADs vary across providers, with those seeking to undertake capital expenditure mostly preferring RADs. Stakeholder views suggested RADs facilitate low cost capital investment for some providers and allow banks to offer more debt to more providers. However, stakeholders suggested RADs may also create a more volatile financial structure and impose barriers to entry for equity. Stakeholders suggested a significant and sustained reduction in RADs would negatively impact capital expenditure and increase provider financial risk. Our study proposes that government intervention to stop a significant reduction in provider RAD balances should only occur if access to care is threatened. Intervention options could include enforcing liquidity and capital adequacy requirements, increasing investor returns to attract more equity and facilitate more commercial debt and establishing a government backed accommodation capital facility. JEL Classification: D14, G41, G51, G53, I18

Dynamic Maintenance of Solvency of the Russian Insurance Companies: the Evidence from Russian Insurers

The Russian economy is facing sanctions pressure, resulting in weakening business relations with foreign insurers. Medium-sized insurance companies, targeting regional economic entities, play a crucial role in the insurance market. To improve the efficiency of Russian insurance, the number of medium-sized companies operating in regional markets must increase. To regulate their capitalization, special conditions must be developed, focusing on capital adequacy requirements and financial stability parameters. While earlier research has examined what factors might impact profitability growth, the investment income factor in maintaining corporate financial stability has been underexplored. This paper aims toexplore conditions for improving insurers' financial soundness through growth of a company's internal capitalization. Medium-sized insurance companies often struggle to meet regulators' minimum capital requirements (a core variable linked with companies’ capitalization) leading to potential market shrinkage. Our hypothesis is that it possible to create a financial reserve that meets the regulator’s increasing equity requirements without raising additional external investments. This study examined the factors which impacted the growth of medium-sized insurance companies operating in the emerging markets. Operating results of seven randomly selected medium-sized insurance companies in 2014–2022 were used forthe analysis. The paper suggests that institutionalization of insurance companies' capitalization is crucial to minimize the risk of capital inadequacy. The study contributes to our understanding of how medium-sized insurance companies can be governed and suggests a way to increase their capitalization.

Role of Disciplinary Tools in Maintaining Bank Performance and Financial Stability: Evidence from Emerging Economies

The aim of this study is to examine the role of disciplinary tools, that is, capital adequacy requirement and market discipline in maintaining the banks’ performance and financial stability. The study employs a panel dataset of 600 commercial banks from BRICS economies for the period ranging from 2005 to 2020 using the panel regression. The robustness of the results is validated using the system GMM (generalized method of moments). The study reveals that, in a linear model, capital adequacy ratio has a positive influence on performance and stability, and market discipline has a negative influence on performance and stability. In a non-linear model, capital adequacy ratio has a concave relationship. Further, the study discusses the critical determinants of profitability and stability. JEL Classification: G21, G28, G32

On the design of bail-in-able bonds from the perspective of non-financial firms

To prevent black swan events such as the financial tsunami or COVID-19 from crashing overall economic systems, governments provide bailouts to too-big-to-fail financial institutions and non-financial firms such as airline companies with tax payers’ money. To avoid unfair bailouts, using bail-in-able bonds to absorb an issuing bank’s losses and to fulfill capital requirements such as BASEL III has been widely studied. Without capital adequacy requirements, non-financial firms also issue bail-in-able bonds because the embedded loss-absorbing mechanism can cut debt repayments down to reduce bankruptcy risk and thus increase the overall benefits of these firms’ claim holders. However, bond investors require higher rewards to compensate for their potential losses once this mechanism is triggered. In addition, unlike financial institutions, which are strictly regulated, such a mechanism may induce non-financial issuers to take on excessive risk to benefit themselves at the expense of their debt holders. To investigate how the issuances of various (non)-bail-in-able bonds influence the equity and the existing debt holders’ benefits from a non-financial issuer’s prospective, we develop novel quadrature pricing formulas based on the structural credit risk model. We find that while non-bail-in-able bonds can be wise choices for low-leverage issuers, bail-in-able bonds with benefit-sharing mechanisms allowing investors to share issuers’ upside profits can efficiently suppress interest expenses and circumvent the asset substitution problem for high-leverage issuers. If the value of an issuer (such as an oil shale firm) mainly depends on the value of that asset (such as oil), issuing a bail-in-able bond referring to the asset could be a wise choice. Otherwise, issuing a bond referring to the issuer’s stock price could provide timely fund injections and low interest expenses for a high-leverage public firm.

Current Situation and Challenges in Indian Banking Sector

Abstract: The Indian banking sector is facing several challenges due to the rapidly changing financial environment. The key issues include the high level of Non-Performing Assets (NPAs), increasing competition from fintech companies and digital payment platforms, difficulty in meeting capital adequacy requirements, concerns about governance and risk management, and challenges in Asset Liability Management (ALM). Addressing these challenges is critical for the Indian banking sector to remain competitive and continue playing a crucial role in the country’s economy. One of the largest in the world and essential to the nation's economy is the Indian banking sector. However, it is currently facing several challenges due to the rapidly changing financial environment. Here are some of the key issues and challenges faced by the Indian banking sector: Non-Performing Assets (NPAs): The high level of NPAs, or bad loans, is one of the main problems Indian banks face. The gross NPA ratio of Indian banks, according to the Reserve Bank of India (RBI), was 7.5% in March 2021. The profitability and capital sufficiency of banks have been under intense strain as a result of this is digital disruption.The traditional banking sector has been impacted by the growth of fintech businesses and digital payment platforms. These new competitors, who can provide customers with speedier, more convenient, and less expensive services, are putting pressure on Indian banks.

Taming Housing and Financial Market Instability: The Effect of Heterogeneous Banking Regulations

As a response to the latest financial crisis, the Basel Committee published the Basel III accords which intensify micro- and introduce macro-prudential instruments to enhance the resilience of the financial market. One crucial aspect that the regulatory reforms do not address is the diversity of the banking sector. We introduce a heterogeneous agent-based model that develops a housing and a capital market to assess the ability of Basel III rules to mitigate mutual feedback effects and dampen instability. Computational experiments reveal that the most stable markets are achieved if the financial market is diversified and consists of different types of financial intermediaries that need to comply with type-specific capital adequacy requirements. The results point out that capital adequacy requirements are, in principle, effective in stabilizing the banking sector. However, the stability of housing and share prices and the solidity of the banking sector can be increased if capital adequacy requirements are aligned to the individual business models of financial intermediaries and their institutional frameworks. These findings advocate in favor of a diversified banking sector and heterogeneous capital adequacy requirements.

An Analysis of Non-Performing Loans in Kenya

Kenya has historically recorded elevated levels of non-performing loans (NPLs) in the banking sector. The average NPLs ratio per year exceeded nine percent since 2010. The ratio has been particularly elevated in the last five years, averaging 13.23 percent per annum. Except for Ghana, Kenya’s NPLs as a percent of gross loans has been way above those of its peers in the last three years. The NPLs problem in the country cuts across all sectors of the economy and commercial banks irrespective of size or ownership. The concentration of NPLs was persistently high in Trade, Real Estate, Manufacturing, and Personal and Household sectors during the whole period under review, 2010-2021. The sectors with concentration of NPLs were the same sectors with concentration of sectoral distribution of loans by value and number of loan accounts. This calls for close monitoring of these four sectors by the regulatory authority to ensure that banks make adequate provisions for the loans in these sectors and abide by supervisory and regulatory requirements to mitigate risk of default. Delayed payments from private and public sectors was found to be one of the main contributors to the high NPL percentages. In 2012, the high interest rate regime impacted the quality of loans and advances negatively, thus contributing to high default rates. The high NPLs levels in the Real Estate and Trade sectors have been attributed to slow uptake of housing units and challenges in the business environment, respectively. Apart from the Central Bank’s Prudential Guidelines, there are no common strategies that commercial banks are required to apply to help manage stocks and flows of NPLs. While different commercial banks manage the NPLs problem internally, the commercial banks in the country do not have dedicated in-house NPLs units. To reduce the NPLs problem in the country, commercial banks should employ new innovative ways of managing NPLs stock and flows like setting up separate dedicated in-house NPLs units; the Central Bank should pay particular attention to the provisions that are often violated (in particular, capital adequacy requirement, single obligor limit and prohibited business) and come up with specific actions to effectively enforce compliance; and the public sector should make a concerted effort to reduce pending payments to the business community. Keywords: Non-performing loans, gross loans, supervisory and regulatory compliance, credit risk DOI: 10.7176/JESD/14-8-01 Publication date: April 30 th 2023

Capital ideas: optimal capital accumulation strategies for a bank and its regulator

We formulate a continuous-time model of a deposit taking bank, operating subject to capital adequacy regulation, and where the bank's loans are exposed to default risk. The bank maximises its market value of equity by appropriately controlling loan and equity issuance, dividend payments, and endogenous closure. Of interest to regulators, we show how the bank responds to the span of capital adequacy requirements and to changes in default variance. We find a nonmonotonic response of bank lending to increased capital requirements (initially increasing and then decreasing). We also find that the probability of early closure (through either insolvency or endogenous closure) can be minimised for a well-chosen capital adequacy ratio. Moreover, the level of capital requirement that minimises the probability of early closure and maximises lending is fairly robust to changes in the bank's default variance/risk; contributing to the ongoing discussion on optimal bank capital.

Relationship between Banks’ Perception on Bank of Tanzania Regulatory Reviews and Financial Performance: Evidence from selected Commercial Banks in Tanzania

The Central Bank of Tanzania has undergone various bank regulations reviews at different periods of time such as the one undertaken in 1998, 2008 and 2014. This study, therefore, intended to assess the relationship between banks perception on regulatory requirements reviews decisions and the bank performance. The study employed a cross-sectional design with the target population of 36 commercial banks. A sample of 120 respondents were selected from 24 commercial banks obtained in Dar es Salaam City. Primary data were collected from bank managers while secondary data were collected from audited annual financial statements. Descriptive statistics and correlation analysis were used for data analysis. Findings from the study showed that most banks had high perception regarding new regulations. However, the study noted low perception on the number of quarterly publication days, and on liquidity and cash reserve ratios requirements which seemed to be difficult for most banks to afford. Correlation analysis results showed that the relationship between banks perception on the new regulatory requirements and the financial performance was positive and significant with a high degree of correlation. The study concludes that most banks highly supported the reviews made by the BoT on capital adequacy and information reporting and disclosure requirements. The study recommends that commercial banks need to implement the new capital adequacy requirements and information reporting and disclosure requirements with special attention in order to make banks more profitable. Moreover, the regulator of banks needs to think on reviewing publication days and liquidity requirements.

Effect of Capital Adequacy Requirement on Profitability of Selected Banks Listed on Ghana Stock Exchange

The study assessed the effect of capital adequacy requirement on profitability of the Ghana Stock Exchange banks between 2013 and 2018. The analyses were based on the Ghana Stock Exchange secondary statistics. The analyzes specifically assessed trends in the capital adequacy ratios and Ghana Stock Exchange profitability of banks and determine the effect of capital Adequacy Ratio on profitability of listed banks. The study found that the banks' average Capital Adequacy Ratio was (Mean=17.21%) in the time. While the mean Return on Equity (Mean=25.46%) and the mean Return on Asset was found to be (Mean=3.05%). While the profitability was adverse and insignificantly affected by the Capital Adequacy Ratio, they were adverse and small in terms of the Return on Equity, while Capital Adequacy Ratio had a positive and important impact on the Return on Equity. Bank size did not have a major effect on Return on Equity and Return on Asset. For local banks, the mean Capital Adequacy Ratio for international banks was approximately the same. Therefore, the study suggested that businesses continue to operate, if not, to guarantee banks are able to cope with any 'credit crunch' economic recession. Banks can ensure that surplus capital is transformed into investment to maximize investment returns.

Credit Risk as Moderating Effect of Minimum Capital Adequacy Requirement, Credit Distribution and Efficiency Operational to Profitability

Abstract
 This study aims to determine: (1) to determine the effect of minimum capital adequacy on profitability, (2) to determine the effect of lending on profitability, (3) to determine the effect of operational efficiency on profitability, (4) to determine the effect of capital adequacy obligations minimum on profitability moderated by credit risk, (5) to determine the effect of lending on profitability moderated by credit risk, and (6) to determine the effect of operational efficiency on profitability moderated by credit risk. To achieve the research objectives, the research design used is correlational quantitative using secondary data obtained frompublication reportbank. The population of this study were all BPDs throughout Indonesia, amounting to 31 banks. The sampling technique in this study used purposive sampling with a total sample of 25 companies. The data analysis technique used is moderated regression analysis. The results showed that (1) the minimum capital requirement has a positive effect on profitability, (2) credit distribution has a positive effect on profitability, (3) operational efficiency has a negative effect on profitability, (4) credit risk weakens the effect of the minimum capital requirement on profitability, (5) credit risk weakens the effect of lending on profitability, and (6) credit risk strengthens the effect of operational efficiency on profitability.
 Keywords: minimum capital requirement, lending, operational efficiency, credit risk, profitability

LIKUIDITAS, KREDIT MACET DAN KINERJA KEUANGAN BPRS DI INDONESIA

This study aims to determine the effect of Liquidity and Bad Credit on Financial Performance in BPRS companies registered with the OJK for the 2016-2020 period. Liquidity is proxied by Cash Ratio (CR) and Bad Loans is proxied by Non-Performing Loan (NPL), while Financial Performance is proxied by Return On Equity (ROE), Financing to Deposit Ratio (FDR) and Minimum Capital Adequacy Requirement (KPMM).This research is a causative research. The population in this study are BPRS companies registered with the OJK with a total of 173 companies. The sample selection used a purposive sampling technique and the research sample obtained was 68 BPR Syariah. The data in this study are secondary data obtained from the Financial Services Authority (OJK) and the website official of the company concerned. The data analysis used was descriptive analysis followed by requirements testing including normality test, multicollinearity test, heteroscedasticity test, and autocorrelation test. The statistical method used to analyze the data using multiple linear regression analysis.The results showed that the liquidity ratio (Cash Ratio) and Bad Credit (Non-Performing Loan) partially had no significant effect on the financial performance of Return On Equity (ROE), Financing to Deposit Ratio (FDR) and Minimum Capital Adequacy Requirement (KPMM), while ratio of Non-Performing Loans (NPL)at Sharia BPRs registered with the Financial Services Authority (OJK) in the 2016-2020 period.

Determinants of Banks’ Stability in Jordan

This paper aims to examine the determinants of financial stability in Jordanian commercial banks based on annual data for the period from 2011 to 2018. Based on the pooled effect model, this study shows that SME loans and capital adequacy positively and statistically affect the stability of Jordanian commercial banks, while financial inclusion, liquidity risk and credit risk negatively and statistically affect the stability of Jordanian commercial banks. The study recommends increasing the directing of bank loans towards small and medium enterprises, and the necessity for bank managers to commit to capital adequacy requirements because of their positive impact on banks’ stability. This study recommends that banks experiencing financial stability accelerate the increase in the rate of financial inclusion because financial inclusion ratios are very low in most of these stable banks. On the other hand, Jordanian commercial banks that have relatively high rates of financial inclusion should reduce the operating expenses resulting from financial inclusion. Bank managers also have to maintain sufficient liquidity in their banks and enhance credit standards by increasing collateral requirement from customers.

The Effect Of The Minimum Capital Availability Obligation (CAR) on Profitability (ROA) at Perumda BPR Majalengka, Majalengka Regency

Background: Effect of Minimum Capital Adequacy Requirement (CAR) on Profitability (ROA) at Perumda BPR Majalengka Majalengka Regency. Aim: Capital Adequacy Ratio (CAR) is needed to calculate the capital adequacy of a bank and determine the credit that can be disbursed. Interest profit generated from loans disbursed can increase bank profitability. This study aims to determine the development of the Capital Adequacy Ratio (CAR), to determine the development of the level of profitability (ROA), and to determine the effect of the Capital Adequacy Ratio (CAR) on the level of profitability (ROA) at Perumda BPR Majalengka, Majalengka Regency. Method: The method used in this research is a descriptive method with a quantitative approach. To determine the effect of the Capital Adequacy Ratio (CAR) on the level of profitability (ROA), statistical testing is used. Statistical testing used is the use of linear regression, Pearson correlation coefficient, coefficient of determination, hypothesis testing, and also using the SPSS 24.0 application for windows to strengthen manual calculations. Findings: The results of data analysis using SPSS 24 for windows show that the Capital Adequacy Ratio (CAR) has a significant influence on the level of profitability (ROA) because the t count is greater than the t table or 3.008 > 2.35336 correlation value between Capital Adequacy Ratio (CAR) and profitability. (ROA) based on the research data obtained is 0.757 This value indicates the strength of the relationship is included in the category of a strong relationship. The regression equation is as follows Y = 0.374 + 0.214X. The effect of the Capital Adequacy Ratio (CAR) on the level of profitability (ROA) is 57.3%, while the remaining 42.7% is influenced by factors other than the Capital Adequacy Ratio (CAR) such as credit realization, third-party funds (TPF) and interest and public trust.

The Relationship Between Regulatory Requirements Reviews, Compliance Benefits and Costs: Evidence from Selected Commercial Banks in Tanzania

The Central Bank of Tanzania (BoT) has undergone various bank regulations reviews at different periods of time including 2008 and 2014 reviews. After the reviews some banks have shown low compliances, collapsed and merged while others have shown high compliances and greater performance. This study therefore, intended to assess how commercial banks in Tanzania benefits from complying with new regulatory requirements and to determine to what extent does compliance costs affects banks performance. The study employed an exploratory research design using the sample size of 24 commercial banks selected from Dar es Salaam headquarters; however, only 13 key informants were successfully reached. Primary data were collected from compliance and risk management managers using interview guide. Thematic analysis was used for data analysis and findings from the study show that most banks have well benefited with the new regulatory requirements in terms of increase in profit, expansion of more branches, ATMs and increase in number of customers. Considering the compliance costs; findings show that to some extent some new regulatory requirements reviews have increased operating costs to most banks. The study recommends that banks should carefully design strategies which will help them to control NPL, manage and increase more capital and liquidity requirements. To the regulator the study recommends that; BoT should think of reviewing liquidity requirements and cash reserve ratio which seem to be too high and costly for most banks to afford. The BoT can also introduce separate capital adequacy requirements as per bank size.

Bank Financial Performance and its Linkage with Capital: A Dynamic Panel Data Analysis of Public Sector Banks in India

This article empirically investigates the linkage of capital infusion in the Public Sector Banks (PSBs) in India with the capital adequacy, asset quality, profitability, operational efficiency and the market position of the banks. Utilising a balanced panel data of total 21 PSBs over 9 years (2009 to 2017), we analyse the key determinants of the Indian PSBs’ profitability, net interest margin (NIM), solvency and market efficiency. The study applies a two-step dynamic panel generalised methods of moments. We find empirical evidence that the Capital Infusion programme of the Government during 2008–2009 to 2016–2017 has significant impact on the performance of PSBs in India. We have observed that with frequent infusion of capital by the government, banks were able to meet the regulatory Basel II/III capital adequacy requirements and it has positive influence on their market capitalisation as well as NIM. However, capital infusion has an insignificant impact on improving return on assets (ROA) of banks. Our study suggests that a higher common equity tier 1 capital ratio leads to better market reputation and solvency position of the banks. The results of the study provides insight for bank management, regulators and policymakers for improving bank performance and better utilisation of scarce capital and public money. JEL Code: G21, G32, G34

The Effect of Capital Adequacy Requirements on Profitability: An Empirical Study on Licensed Finance Companies in Sri Lanka

Licensed Finance Companies (LFCs) in Sri Lanka are recognized as authorized and regulated financial institutions to accept public deposits. However, with the recent collapse of a few LFCs in Sri Lanka, a serious concern has been raised about whether the LFC sector in Sri Lanka does not expose its shareholders to excessive levels of risk. Accordingly, the primary objective of this study is to examine the relationship between capital adequacy and the profitability of LFCs in Sri Lanka. This study is classified into the quantitative research approach based on secondary data of 18 LFCs in Sri Lanka from 2011 to 2020. The Core Capital Adequacy Ratio (CCAR), Total Capital Adequacy Ratio (TCAR), and LFC size (SIZE) were used as independent variables and as measures of profitability of LFCs, Net Interest Margin (NIM), Return on Assets (ROA) and Returns on Equity (ROE) were considered as dependent variables. The empirical results indicated that NIM, ROA, and ROE are positively related to CCAR, but none was significant. Further, NIM and ROA show a positive relationship with TCAR; however, only a significant relationship between ROA and TCAR was observed. Accordingly, this study recommends that since ROA would be increased in the capital adequacy level of LFC, all LFCs need to develop their internal policies to ensure that they have a clear set of capital adequacy expectations in place.

Financial Regulation, Financial Inclusion and Competitiveness in the Banking Sector in SADC and SAARC Countries: The Moderating Role of Financial Stability

Financial inclusion is a widely used measure to improve the living standards of households and foster inclusive economic growth. Thus, financial inclusion is one of the main policy objectives in developing countries. Besides, financial regulation (capital adequacy requirement) is a policy measure used to ensure financial stability. The objective of this study is to examine the effect of financial regulation on competitiveness and financial inclusion in 15 countries in the SADC (Southern Africa Development Community) region and 8 countries in the SAARC (South Asian Association for Regional Cooperation) region over the period 2005–2018. The result of Feasible Generalized Least Squares (FGLS) estimation suggests that financial regulation reduces competitiveness and hampers financial inclusion in the banking sector in the two regions. Furthermore, we find that financial stability moderates the negative effect of financial regulation on competitiveness and financial inclusion, meaning that financially stable banks remain competitive and normally offer financial products and services even if strong capital adequacy requirements are implemented. Additionally, we find that competitiveness increases financial inclusion in countries in the SADC region. The policy implication of this study focuses on regulatory flexibility to preserve the need for greater financial inclusion in the two regions. As for the practical implication, the study calls for strategic measures to preserve stability such as complementing financial inclusion with financial literacy, fostering corporate governance.

Assessing the economy-wide impacts of strengthened bank capital requirements in Indonesia using a financial computable general equilibrium model

ABSTRACT After the 2008 global financial crisis, authorities across the globe stressed the importance of equity capital to absorb losses. While many countries have raised bank capital adequacy requirements (CARs), the comprehensive impact assessment of this policy for emerging economies remains largely unexplored. We use a financial computable general equilibrium (FCGE) model of Indonesia called AMELIA-F to investigate the economy-wide impact of a 100 basis points increase in the CAR of Indonesian banks. Bank balance sheets contract as they move away from holding riskier assets, aiding macroeconomic stability. However, both non-housing and housing investment contract as banks pass on higher funding costs, driving long-run real GDP below baseline. As we discuss, debt-to-equity ratios for these sectors, and the economy-wide private debt to income ratio all fall, thus aiding long-run macroeconomic stability.