Determinants of the capital adequacy ratio of foreign banks’ subsidiaries: The role of interbank market and regulation

Abstract

This paper examines the factors influencing the capital adequacy ratio (CAR) of foreign banks. We test whether the CAR of subsidiaries and branches in developed and developing countries depends on the same factors. We use data from 310 subsidiaries and 265 branches to test the impact of the parent banks' fundamentals on subsidiaries' and branches' capital ratios. We also study how the economic condition and regulatory environment in a bank's home country determine foreign banks' CAR. Our results provide strong evidence that the CAR of subsidiaries and branches operating in developing and developed countries do not depend on the same set of explanatory factors. We also find that the regulatory framework of a parent bank's home country affects the capitalization of its foreign subsidiaries in the host countries. Finally, we show that specific variables of the parent bank have a stronger effect for foreign banks highly related to the interbank market.

Determinants of capital adequacy ratio on banking industry: Evidence in Indonesia Stock Exchange

“…This study is in line with research conducted Thoa & Anh (2017) found that the loan asset ratio has a significant negative effect on capital adequacy ratio. This research is supported by research conducted by Mili et al (2017) who argued that the loan asset ratio has a negative effect on capital adequacy ratio. An increase in the loan tends to decrease the CAR, which explains that capital regulation may decrease after the extension of the crediting period.…”

“…Buyuksalvarci & Adioglu (2011) analyzed the factors affecting the capital adequacy ratio of LOA results showed that credit (LOA) had a negative effect on CAR. Mili et al (2017) argue that an increase in the loan tends to decrease CAR. This explains the regulation of capital may decrease after the extension of the crediting period.…”

Determinants of the Capital Adequacy of U.S Financial Institutions

“…Evidence showed that bank size was inversely related to CAR whereas profitability, liquidity and riskiness, as measured by the quality of the asset portfolio, were shown to be statistically insignificant in explaining CAR. A study by Mili et al (2014), using a dataset of multinational banks, examined empirically the factors that affect CAR. They used among other factors, macroeconomic factors as well as variables related to the bank's subsidiaries.…”

“…Results showed that firm size was the only factor that affects capital adequacy, whereas profitability, liquidity and asset quality were shown to be insignificant in explaining capital adequacy. Mili, Sahut, and Trimeche (2014), using a dataset of multinational banks, showed that bank's size is inversely related to Capital Adequacy Ratios (CAR) whereas some riskiness and profitability measures were shown to affect positively CAR. They also showed that some other profitability ratios, such as return on assets (ROA) do no affect CAR.…”

The New Capital Adequacy Framework (Basel Iii) Options and Issues in Commercial Banks of Lithuania

“…One of the factors influencing the determination of the amount of bank capital is the amount of the costs necessary to restore the capital. Banks, which are seeking to avoid the costs associated with the reconstruction of the capital in a very short period of time, tend to hold more capital than it is required by the supervisory authorities (Peura, Keppo, 2006). This capital in the scientific literature is named a buffer capital.…”