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Abstract
The aim of this paper is to present an empirical evidence to explain some bank internal factors that influence the capital adequacy ratio (CAR) of listed banks in the Kingdom of Saudi Arabia (KSA). We used the data covering from 2008 to 2012 for the Saudi Arabian Banks that are listed in Saudi Arabian Stock Market, Tadawul.
By using a panel data and modelling through fixed effect, robust estimation and generalized least square (GLS) and feasible GLS we found that except non-performing loans, other variables have significant effect on CAR. Depending on the model type the results vary.
Fixed effect, robust estimation and least squared dummy regression (LSDR) results shows that loans to assets ratio has negatively significant while leverage and the size of the banks have positively significant in determining CAR. In GLS estimation we found that in addition to earlier model results, loan to deposit ratio has negatively significant and the return on assets has positively significant on CAR. Our analysis also shows that there are significant bank specific effects in panel data structure while no time effect is found.
JEL classification numbers: G21, C33
Keywords: Banking, Capital Ratio, Capital Requirement, Panel Data
1 Introduction
The capital structure and the required level of capital are important topics for any corporation whether they are financial or non-financial. In addition to the importance of structure and the level of capital, the impact of regulations on such variables also cannot be ignored.[1] Banks, as financial service providers give a special importance on the level and structure of capital they have. Although there are market driven requirements for holding a certain level of capital, the impact of capital requirements regulations of banks are very important on capital held by banks. [2] In addition to that, the level and the structure of capital held by banks are also significant for macroeconomic indicators of the countries and for applications of monetary policies. Such importance has been discussed in the literature extensively. Blum and Hellwig [3], Concetta Chiuri, Ferri [4] and Borio and Zhu [5] are among these studies. Blum [6] indicated that capital adequacy requirements may increase riskiness of a bank. Therefore, from several perspectives capital level and its structure are important variables that should be...