Testing Capital Adequacy Ratio in Western Balkan Countries and It's Compliance with Basel Accord III

Abstract

The capital adequacy ratio (CAR) is critical for banks' solvency and protection against unforeseen occurrences that may emerge as a result of their operations. The capital adequacy ratio is one of the metrics used to assess a bank's ability to sustain an acceptable amount of loss. Therefore, banks must provide adequate capital to comply with national and international regulatory capital requirements. The research primary objective is designed to examine the relationship between capital adequacy ratio and return on assets, liquidity assets to total assets, total assets, loan to assets ratio, and total equity to total assets as explanatory variables in Western Balkan countries. The second objective is to assess capital adequacy ratio and its compliance with Basel III requirement. The research covers the years from 2010 to 2020. The theory has neglected research of capital adequacy estimation in Western Balkan region and this research will address shortcomings enabling policy makers to better monitor capital adequacy compliance. The rationale of research consists of financial structure of Western Balkan economies which is bank-based, being economies in transition and aspiring for EU membership, no research on regional Balkan basis, bank obligations is public good, and depositors of bank have least data on capital standing and risks compare to the other stakeholders. More capitalization make bank safer therefore, capital regulation and compliance with CAR requirements became crucial tool. The econometric methods used are Panel Least Squares and Generalized Method of Moments. Generalized Method of Moments applied in research in banking field reflects new contribution to the existing literature. Novelty of research and contribution in banking is assessed taking into account the final results and empirical findings. The findings show that the banking sector in Western Balkan countries adheres to strong capital adequacy norms that surpass not only national regulatory requirements but also BIS III standard. Empirical findings indicate that Return on Assets has positive highly significant impact and Total Assets has positive impact on the capital adequacy ratio considering them as two important factors in determining capital adequacy ratio. Finally, research implications are of importance for financial regulatory authorities and banking institutions.