The determinants of banks’ capital adequacy ratio: Evidence from Western Balkan countries

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Abstract

This research aims to evaluate the impacts of liquidity, profitability, size, loans and capital structure on banks’ capital adequacy ratio (CAR) in the Western Balkan region using annual data from 103 commercial banks operated in Western Balkan countries for the period between 2010 and 2018. Panel data fixed effect method is employed. The data comprises of a total 51 observations for panel least squares. The empirical findings obtained panel data regression show that profitability proxies by the return on asset (ROA) have the largest impact on CAR among other financial ratios. In addition, liquidity and size have statistically significant positive effects in determining capital adequacy ratio for the banks in the region, unlike leverage ratio. However, the leverage ratio has a negative impact on the capital adequacy ratio. The policy implications of this study suggest that in order to accomplish requirements for capital adequacy expectations are to have good indicators in regard to performance, liquidity and size.

Keywords: Capital Adequacy Ratio, Banking, Western Balkan, National and International Regulators

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: E44, G21, C23, C26

Received: 16.03.2021
Accepted: 16.06.2021
Published online: 17.06.2021

How to cite this paper: Keqa, F. (2021). The determinants of banks’ capital adequacy ratio: Evidence from Western Balkan countries [Special issue]. Journal of Governance & Regulation, 10(2), 352–360. https://doi.org/10.22495/jgrv10i2siart15