| Title : | Bank capital adequacy ratio: a case study of Nepalese commercial bank | | Material Type: | printed text | | Authors: | Brij Mohan Shah, Author | | Publication Date: | 2017 | | Layout: | 103p. | | Size: | GRP/Thesis | | Accompanying material: | 6/B | | Languages : | English | | Descriptors: | Bank capital
Banks and banking
| | Class number: | 332.1 | | Abstract: | Banking sector being one of the most highly leveraged sectors of any economy, face high risks. In the wake of the introduction of prudential regulation as an integral part of financial sector reforms, there has been a growing debate as to whether capital adequacy requirements are the best means to regulate the banking system (Fatima, 2014). In practice, capital adequacy ratios are involved by financial transactions of the bank such as profit and loss sharing financing and that made it unequal capital standards from time to time or from bank to other, banks must keep capital adequacy at specific minimum level to avoid risks and bankruptcy. Nevertheless, the capital level is determined by the bank requirements, by the risk and by the capital cost. Miller (1958) dealt with the issue of “cost of capital” and showed that under restrictive assumptions it does not matter whether a firm finances itself with a debt or equity financing.
Juca et al. (2012) showed that the banks’ capital structure and its determinants initially concentrated on bank specific characteristics such as size, risk, liquidity, profitability and leverage. Mpuga (2002) argued that the inadequacy of minimum capital standards in accounting for risks in banks assets portfolio could be one of the major factors leading to bank failures. Epstein (2005) studied on capital adequacy failures and concludes that capital adequacy and ratio analysis (CAR) are failed strategies.
The major purpose of this study is to examine the relationship between bank specific and macroeconomic variable with capital ratio in Nepalese commercial banks. The specific objectives are: to analyze the structure and pattern of dependent (capital adequacy ratio and core capital) and independent variables (return on assets, return on equity, deposit and bank size), to identify the effect of return on equity and return on assets on capital ratio, to examine the relationship between deposit and bank size and capital ratio and to examine the relationship between macro-economic factors such as GDP growth, inflation and interest rate on capital ratio of the bank.
This study based on the secondary source of data which were gather for a sample of 20 commercial banks of Nepal within the time period from 2009/10 to 2014/15, leading to the total of 120 observations The secondary data have been obtained from Banking and Financial Statistics and Bank Supervision report published by Nepal Rastra Bank and annual report of selected banks. The research design adopted in this study is descriptive and causal comparative types as it deals with relationship of bank specific and macroeconomic factor like return on assets, return on equity, deposit, bank size, economic growth and inflation rate with CAR (capital adequacy ratio) and CORE (core capital). The statistical methods used in the analysis are descriptive statistics, correlation analysis and regression analysis.
The result revealed that the return on assets and return on equity are positively correlated with capital adequacy ratio. Study reveals that deposits, bank size, economic growth and inflation rate are negatively correlated with capital adequacy ratio. It indicates that higher the deposits, bank size, economic growth and inflation rate, lower would be capital adequacy ratio. The result also shows that return on assets, return on equity and deposits are positively correlated to core capital. Study reveals that bank size, economic growth rate and inflation rate are negatively correlated to core capital. It is revealed that beta coefficient of return on assets is positive with capital adequacy ratio and core capital which indicates that banks having higher return on assets have higher capital adequacy ratio and core capital.
The study concludes that return on assets and return on equity has positive and significant relationship with capital ratio indicating higher the return on assets and return on equity, higher would be the capital adequacy ratio and core capital. Similarly, deposit has negative and significant relationship with the capital adequacy ratio whereas it has positive impacts on the core capital for Nepalese commercial. The study also concludes that bank size has significant negative impact with both capital adequacy ratio and core capital of Nepalese commercial banks indicating higher the bank size; lower will be the capital adequacy ratio and core capital. Similarly, the study also concludes that economic growth and inflation rate has negative and significant impact on the capital adequacy ratio and core capital indicating that higher the economic growth and inflation rate lower would be the capital adequacy ratio and core capital.
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Bank capital adequacy ratio: a case study of Nepalese commercial bank [printed text] / Brij Mohan Shah, Author . - 2017 . - : 103p. ; GRP/Thesis + 6/B. Languages : English | Descriptors: | Bank capital
Banks and banking
| | Class number: | 332.1 | | Abstract: | Banking sector being one of the most highly leveraged sectors of any economy, face high risks. In the wake of the introduction of prudential regulation as an integral part of financial sector reforms, there has been a growing debate as to whether capital adequacy requirements are the best means to regulate the banking system (Fatima, 2014). In practice, capital adequacy ratios are involved by financial transactions of the bank such as profit and loss sharing financing and that made it unequal capital standards from time to time or from bank to other, banks must keep capital adequacy at specific minimum level to avoid risks and bankruptcy. Nevertheless, the capital level is determined by the bank requirements, by the risk and by the capital cost. Miller (1958) dealt with the issue of “cost of capital” and showed that under restrictive assumptions it does not matter whether a firm finances itself with a debt or equity financing.
Juca et al. (2012) showed that the banks’ capital structure and its determinants initially concentrated on bank specific characteristics such as size, risk, liquidity, profitability and leverage. Mpuga (2002) argued that the inadequacy of minimum capital standards in accounting for risks in banks assets portfolio could be one of the major factors leading to bank failures. Epstein (2005) studied on capital adequacy failures and concludes that capital adequacy and ratio analysis (CAR) are failed strategies.
The major purpose of this study is to examine the relationship between bank specific and macroeconomic variable with capital ratio in Nepalese commercial banks. The specific objectives are: to analyze the structure and pattern of dependent (capital adequacy ratio and core capital) and independent variables (return on assets, return on equity, deposit and bank size), to identify the effect of return on equity and return on assets on capital ratio, to examine the relationship between deposit and bank size and capital ratio and to examine the relationship between macro-economic factors such as GDP growth, inflation and interest rate on capital ratio of the bank.
This study based on the secondary source of data which were gather for a sample of 20 commercial banks of Nepal within the time period from 2009/10 to 2014/15, leading to the total of 120 observations The secondary data have been obtained from Banking and Financial Statistics and Bank Supervision report published by Nepal Rastra Bank and annual report of selected banks. The research design adopted in this study is descriptive and causal comparative types as it deals with relationship of bank specific and macroeconomic factor like return on assets, return on equity, deposit, bank size, economic growth and inflation rate with CAR (capital adequacy ratio) and CORE (core capital). The statistical methods used in the analysis are descriptive statistics, correlation analysis and regression analysis.
The result revealed that the return on assets and return on equity are positively correlated with capital adequacy ratio. Study reveals that deposits, bank size, economic growth and inflation rate are negatively correlated with capital adequacy ratio. It indicates that higher the deposits, bank size, economic growth and inflation rate, lower would be capital adequacy ratio. The result also shows that return on assets, return on equity and deposits are positively correlated to core capital. Study reveals that bank size, economic growth rate and inflation rate are negatively correlated to core capital. It is revealed that beta coefficient of return on assets is positive with capital adequacy ratio and core capital which indicates that banks having higher return on assets have higher capital adequacy ratio and core capital.
The study concludes that return on assets and return on equity has positive and significant relationship with capital ratio indicating higher the return on assets and return on equity, higher would be the capital adequacy ratio and core capital. Similarly, deposit has negative and significant relationship with the capital adequacy ratio whereas it has positive impacts on the core capital for Nepalese commercial. The study also concludes that bank size has significant negative impact with both capital adequacy ratio and core capital of Nepalese commercial banks indicating higher the bank size; lower will be the capital adequacy ratio and core capital. Similarly, the study also concludes that economic growth and inflation rate has negative and significant impact on the capital adequacy ratio and core capital indicating that higher the economic growth and inflation rate lower would be the capital adequacy ratio and core capital.
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