Paper: arXiv 2304.05935

Authors: Md Shah Naoaj

Abstract

This study investigates the factors that influence the capital adequacy of commercial banks in Bangladesh using panel data from 28 banks over the period of 2013-2019. Three analytical methods, including the Fixed Effect model, Random Effect model, and Pooled Ordinary Least Square (POLS) method, are employed to analyze two versions of the capital adequacy ratio, namely the Capital Adequacy Ratio (CAR) and Tier 1 Capital Ratio. The study reveals that capital adequacy is significantly affected by several independent variables, with leverage and liquidity risk having a negative and positive relationship, respectively. Additionally, the study finds a positive correlation between real GDP and net profit and capital adequacy, while inflation has a negative correlation. For the Tier 1 Ratio, the study shows no significant relationship betweenleverage and liquidity risk, but a positive correlation with the number of employees, net profit, and real GDP, while a negative correlation with size and GDP deflator. Pooled OLS analysis reveals a negative correlation with leverage, size, and inflation for both CAR and Tier 1 Capital Ratio, and a positive correlation with liquidity risk, net profit, and real GDP. Based on the Hausman test, the Random Effect model is deemed moresuitable for this dataset. These findings have important implications for policymakers, investors, and bank managers in Bangladesh by providing insights into the factors that impact the capital ratios of commercial banks.

Complexity vs Empirical Score

  • Math Complexity: 2.5/10
  • Empirical Rigor: 5.5/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: This paper uses standard econometrics (Pooled OLS, Fixed Effects, and Random Effects panel models with a Hausman test) to evaluate bank capital adequacy in an emerging market. While empirically functional and easy to follow, the math is basic standard regression analysis and the novelty is low as it standardly applies known macroeconomic and bank-specific variables to local banking data.

Research Flowchart

  flowchart TD
    A[Research Goal: Determinants of Capital Adequacy in Bangladesh Banks] --> B[Data Collection: Panel Data from 28 Banks, 2013-2019]
    B --> C[Variables Analyzed: Bank-Specific & Macroeconomic Factors]
    C --> D[Methodology: Apply POLS, Fixed Effect & Random Effect Models]
    D --> E[Model Selection: Hausman Test selects Random Effect Model]
    E --> F[Key Outcomes: CAR negatively affected by Leverage & Inflation; positively by Liquidity, Net Profit & Real GDP]