The impact of debt ratio on financial stability through the mediating role of capital adequacy: Evidence from the regulatory framework of the banking industry

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Abstract

The main objective of this study is to examine the impact of debt ratios on financial stability through the mediating role of capital adequacy (CA) in Jordanian commercial banks from 2012 to 2022. This study employs a quantitative approach and utilizes Statistical Package for the Social Sciences (SPSS) and Analysis of Moment Structures (AMOS) v. 26 software to conduct a path analysis test within structural equation modeling (SEM) analysis for testing the study hypotheses and validating the model. The study finds that the debt ratio negatively affects financial stability, as supported by Shahriar et al. (2023) and Nazir et al. (2021). Moreover, capital adequacy negatively affects financial stability, as demonstrated by Usman et al. (2019) and Thoa and Anh (2017). Although capital adequacy positively affects financial stability as evidenced by Sang (2021). However, the debt ratio negatively affects financial stability through capital adequacy as an intermediary variable. The analysis did not explicitly consider external factors, such as economic conditions or regulatory frameworks, indicating the necessity for further validation and expansion of the findings. For future research, it is recommended to utilize qualitative methods or conduct case studies to delve deeper into the nuances of the topic.

Keywords: Capital Adequacy, Commercial Banks, Debt Ratio, Financial Stability

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: G21, G32

Received: 17.02.2024
Accepted: 25.11.2024
Published online: 28.11.2024

How to cite this paper: Al-Manaseer, S. R. (2024). The impact of debt ratio on financial stability through the mediating role of capital adequacy: Evidence from the regulatory framework of the banking industry [Special issue]. Journal of Governance & Regulation, 13(4), 247–256. https://doi.org/10.22495/jgrv13i4siart3