Banks’ capital adequacy ratio: a panacea or placebo

Das, Nupur Moni; Rout, Bhabani Sankar

doi:10.1007/s40622-020-00255-5

Cited by 9 publications

(12 citation statements)

References 42 publications

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“…Besides, there are incentive compatible mechanisms like the availability of good collateral, credit rating (like CIBIL) to ensure that the loan screening is efficient. Ineffective credit screening of borrowers would mean sub-optimal assessment of risk factors (Das and Rout, 2020) and could have a direct impact on the volume of NPAs and hence asset quality (Goswami, 2021). The extant literature suggests that banks having excess liquidity could feel the cost of liquidity burden and disburse loans without proper screening (Islam and Nishiyama, 2019).…”

Section: Inefficient Lending Resulting In High Non-performing Assetsmentioning

confidence: 99%

Bank crisis resolution in India

Bhusan,

Dayanandan,

Gopal

2023

JFRC

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Purpose The academic literature has examined why bank runs happen based on the work of 2022 Nobel Prize-winning economists Diamond and Dybvig. They have found the source of banking/financial crisis in terms of mismatch between liabilities (deposits being short term and savers wanting to short-term access to their money) and assets (long term and illiquid). The Lakshmi Vilas Bank (LVB) crisis intensified when it came under Prompt Corrective Action (PCA) of the Reserve Bank of India (RBI). This situation provides the opportunity to study whether the elements embodied in the theoretical models like Diamond and Dybvig hold true for LVB crisis. This study aims to examine the reasons for the demise of LVB in India using DuPont financial model, peer group analysis and time series structural break in crucial financial parameters. Design/methodology/approach The study examines the reason for insolvency of LVB using financial ratios, financial models (DuPont), financial distress model (Z-score) and asset-liability management. The study also adopts univariate structural break models using quarterly financial data covering the key financial measures used in the RBI’s PCA framework. Findings LVB crisis is like Diamond–Dybvig model, in the sense, savers requiring short-term access to their money (liquidity for their deposits) on the information of high non-performing assets, which further deteriorates the illiquid nature of loan portfolio (assets) of banks. The study finds its profit margin (net interest margin and non-interest margin) and managerial efficiency had started deteriorating since 2018. The study finds that LVB’s main weakness lies in its limited credit appraisal ability, its monitoring and weak internal controls. Lending to sensitive sectors (like real estate, capital markets and commodities) and exposure to large business groups also contributed to its weakness. The study also finds huge, elevated asset-liability mismatch, especially in the short-term maturity buckets. Using univariate econometric time series model, the study also confirms financial weakness being evident much earlier than the time when resolution was undertaken by the RBI through PCA. Research limitations/implications The study has implications for analysing and monitoring financial distress of banks. The study also has implications for devising banking regulation and supervision. Originality/value The study brings in a perspective of the banking regulations using the application of PCA framework on a listed private sector bank. The authors combine an accounting ratio model and combine risk measures that could identify the incipient risks in a bank. The authors believe this will help in refinement of banking regulations and better monitoring mechanisms.

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Section: Inefficient Lending Resulting In High Non-performing Assetsmentioning

confidence: 99%

Bank crisis resolution in India

Bhusan,

Dayanandan,

Gopal

2023

JFRC

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“…The authors predict that a rise in CAR will have a negative impact on GDP. Das and Rout (2020) [2] explored the relationship between capital adequacy ratio, productivity, profits, and danger. Forty-three Indian commercial banks were included in the research, covering the years 1996-2016.…”

Section: Review Of Literaturementioning

confidence: 99%

Analysis of financial resilience of Indian public sector banks

Lathwal,

Boora

2024

Int. J. Finance Manage.

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The banking industry is the most consequential contributor to a country's economic development and progress. The author was motivated to investigate the resilience of India's public sector banking system by the current financial crisis in the United States and Europe. The Capital Adequacy Ratio is a key indicator of a bank's ability to withstand economic downturns. In this study, we examine the CAR to know how well India's public sector banks can weather economic storms. Using data from the previous five years (2019)(2020)(2021)(2022)(2023), this investigation focused on Indian public sector banks. Findings show that India's PSBs have a high capability for resilience since their capital adequacy ratios consistently exceed international capital criteria.

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“…Literatürde sermaye yeterliliğinin bankaların kârlılığı üzerindeki etkisini inceleyen birçok çalışma bulunmaktadır. Bazı çalışmalar sermaye yeterliğini ölçmek için özkaynakların risk ağırlıklı aktiflere oranından oluşan yasal sermaye yeterliliği rasyosunu (SYR) kullanırken (Nguyen, 2020;Madugu vd., 2020;Hidayat vd., 2017;Saona, 2016;Dizgil, 2017;Rakatenda ve Sedana, 2021;Das ve Rout, 2020), bazı çalışmalar ise özkaynakların toplam aktiflere oranını kullanmaktadır (Lee, 2013;Ezike ve Oke, 2013;Winoto ve Bustaman, 2020;Almaqtari vd., 2018;Lee, 2013;Ahmad vd., 2012;Batten ve Vo 2019;Menicucci ve Paolucci, 2015;Djalilov ve Piesse, 2016;Bucevska ve Misheva, 2017;Sufian ve Habibullah, 2009;Pervan vd., 2015Demirgüç-Kunt ve Huizinga, 1999Dietrich ve Wanzenried, 2011;Alharbi, 2017;Pasiouras ve Kosmidou, 2007).…”

Section: Literatür İncelemesiunclassified

“…Kaya vd. ( 2021 Literatürdeki çalışmaların büyük çoğunluğu sermaye yeterliliği rasyosunun kârlılık üzerinde pozitif bir etkisinin olduğunu bulmuştur (Kaya vd., 2021;Ezike ve Oke, 2013;Nguyen, 2020;Hidayat vd., 2017;Dizgil, 2017;Rakatenda ve Sedana, 2021;Das ve Rout, 2020;Sufian, 2009;Vyas, 2008). Sermaye yeterliliğinin banka performansı üzerindeki etkisi büyüktür.…”

Section: Literatür İncelemesiunclassified

“…ROA net kârın toplam aktiflere bölümünden oluşmaktadır ve bankanın varlıklarından kâr oluşturmada ne kadar etkin olduğunu ve bu getirileri yönetebilme kabiliyetini göstermektedir. Bağımsız değişken olarak sermaye yeterliliği rasyosu ile toplam özkaynakların toplam aktiflere oranı kullanılmıştır (Nguyen, 2020;Madugu vd., 2020;Hidayat vd., 2017;Saona, 2016;Dizgil, 2017;Rakatenda ve Sedana, 2021;Das ve Rout, 2020;Lee, 2013;Ezike ve Oke, 2013;Winoto ve Bustaman, 2020;Almaqtari vd., 2018;Kaya vd., 2021). Ayrıca banka performansı üzerinde etkisi olan bankaya özgü ve makroekonomik kontrol değişkenleri de modele eklenmiştir (Almaqtari vd., 2018;Ezike ve M.0, 2013;Batten ve Vo, 2019;Lee, 2013;Hidayat vd., 2017;Menicucci ve Paolucci, 2015;Bucevska ve Misheva, 2017;Alharbi, 2017;Pervan vd., 2017;Nguyen 2020;Demirguc-Kunt andHuizinga, 1999 ve Djalilov ve Piesse, 2016).…”

Section: Literatür İncelemesiunclassified

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The impact of capital adequacy on the profitability of Turkish deposit banks in the period before and after the implementation of Basel II

2022

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The aim of this study is to analyze the effect of capital adequacy of Turkish deposit banks on their profitability (ROA). For this purpose, panel data regression analysis was carried out using quarterly data for the period 2007Q4-2020Q3. Capital adequacy ratio (CAR) and the ratio of equity to assets (capital ratio) were used as an indicator of capital adequacy. In addition to these variables, bank-specific and macroeconomic control variables, which have an effect on bank performance, are also added to the model. According to the results, CAR and capital ratio have a positive effect on ROA of banks. In addition, in order to see the effect of the Basel II implementation, the analysis was made under two periods, before and after the implementation of Basel II by Turkish banks. For both periods, the effect of CAR on the profitability was positive at the 5% significance level. Also, a positive and stronger relationship was found between the capital ratio and ROA in the post-Basel II period. This result shows that strong equity structure contributes to high profitability.

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Banks’ capital adequacy ratio: a panacea or placebo

Cited by 9 publications

References 42 publications

Bank crisis resolution in India

Bank crisis resolution in India

Analysis of financial resilience of Indian public sector banks

The impact of capital adequacy on the profitability of Turkish deposit banks in the period before and after the implementation of Basel II

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