Defining Influential Factors of Capital Adequacy Ratio: An Examination upon Turkish Banking Sector (2006/Q1-2019/Q1)

Abstract

Capital adequacy ratio (CAR) of the Turkish Banking Sector (TBS) decreased dramatically from 30.9% in 2003 to 17.1% as of May 2019. This figure shows that although TBS has still a relatively high CAR compared to many countries, unfortunately there is a decreasing trend. A downward trend in CAR constitutes risks due to the limit of providing credit s. Therefore, the level of CAR has importance for making a positive contribution to sustainable economic growth. So, influential factors of CAR should be determined first. In this context, Multivariate Adaptive Regression Splines (MARS) method, 14 explanatory variables, and quarterly data are used for the period of 2006/Q1-2019/Q1. It is determined that credits/total assets ratio, legal equities, risk weighted assets, nonperforming loans (NPL), NPL/total credits ratio, and credit/deposit ratio are influential factors on CAR in Turkey.

Determinants of Capital Adequacy Ratio of Banks in Botswana

“…Asset to Equity Ratio (A E), Return on Equity (ROE), Non-Performing Loans Ratio (NPL RATIO) and Cost to Income Ratio (C I) were found to be the most influential drivers of the CAR in Botswana banks. The NPL ratio was found to be an influential driver of the CAR for the banks under study, which is in agreement with the study by Kartal (2019). The ROE, being one of the most influential drivers, is in agreement with Al-Tamini and Obeidat (2013), who found out that there is an inverse relationship between the capital adequacy and rate of return on equity.…”

“…Moreover, in their study they found out that there is an inverse relationship with statistical significance between capital adequacy and rate of return on equity and interest rate risk. In a study by Kartal (2019), the factors that influence CAR in the Turkish Banking Sector (TBS) for the period 2006/Q1 -2019/Q1 were studied using Multivariate Adaptive Regression Splines (MARS) on 14 explanatory variables. It was found out that credits/total asset ratio, legal equities, risk weighted assets, non performing loans (NPL), NPL/total credits ratio and credit/deposits ratio were influential factors on CAR in Turkey.…”