Determinants of Capital Adequacy and Their Implications for Banking Stability
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Rubayet Yeasir Mustafa
Md. Halimuzzaman
Mohammad Tofazzal Hossain
Mohammad Kamal Uddin
Capital adequacy is crucial for maintaining the stability and soundness of banking system, particularly in developing countries such as Bangladesh where banks face constant challenges related to quality of assets, compliance with regulatory standards and volatility in macroeconomic. With the implementation of Basel III and expanded regulatory scrutiny from Bangladesh Bank, determining factors that impact capital adequacy and consequently bank stability are becoming even more important. The objective of this paper is to empirically investigate important bank-specific, regulatory and macroeconomic determinants for capital adequacy have been examined, as well as testing whether or not capital adequacy tends to affect the general banking stability in Bangladesh. Particularly, the study purposes to investigate how profitability, asset quality, bank size, liquidity management, regulatory requirements and risk management influence capital adequacy among banks and appraise the influence of capital adequacy on banking solvency. A quantitative research method was used and primary data were obtained with a structured questionnaire which were distributed among banking staff of public, private and Islamic banks in Bangladesh. Descriptive and multivariate regression analysis were used to analyze the data. Findings show that profitability, asset quality, liquidity and efficient risk management positively influence capital adequacy whereas poor macroeconomic environment weakens the level of capitals. Their results also show that sufficient capital substantially increases bank stability by increasing its resilience, depositor confidence and crisis absorption. The study's findings show that enhancing internal control over financial reporting and regulatory enforcement are significant for maintaining banking stability in Bangladesh.
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