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http://dx.doi.org/10.13106/jafeb.2020.vol7.no12.211

How Do the Banks Determine Regulatory Capital, Risk, and Cost Inefficiency in Bangladesh?  

RAHMAN, Mohammad Morshedur (Department of Accounting, University of Chittagong)
CHOWDHURY, Md. Ali Arshad (Department of Accounting, University of Chittagong)
MOUDUD-UL-HUQ, Syed (Department of Accounting, Mawlana Bhashani Science and Technology University)
Publication Information
The Journal of Asian Finance, Economics and Business / v.7, no.12, 2020 , pp. 211-222 More about this Journal
Abstract
This study examines simultaneous relationships between regulatory capital, risk, and cost-inefficiency for a sample of 30 commercial banks in Bangladesh from 2006 to 2018. To conduct the analysis, we used the Generalized Methods of Moments (GMM) in an unbalanced panel data framework. The empirical results show that there is a negative and significant relationship between capital regulation and credit, and overall risk. It is also evident from the results that the capital adequacy ratio is positively and significantly related to default risk and liquidity risk. Therefore, higher capitalized banks take an effort to prevent more credit risk and promote financial stability by reducing liquidity risk. Results also report that banks have been characterized as inefficient, less capitalized, and high risk. On the other hand, efficient banks are more stable but have a high level of liquidity risk. Besides, from the size of the bank, large banks are defined as having lower regulatory capital, are more risk seekers but stable with higher cost-efficiency. Notably, higher capitalized banks are more profitable and cost-efficient by reducing risk. Finally, this study also provides some insightful policy suggestions to the stakeholders.
Keywords
Risk; Capital Regulation; Cost Inefficiency; Generalized Methods of Moments; Commercial Banks;
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