Determinants of bank capital adequacy: International evidence from G7 countries

Abstract

AbstractThe study presents the determinants of bank capital for the G7 countries from 1999 to 2017. It employs a dynamic ordinary least square panel methodology for empirical estimation. The findings suggest that bank capital to total asset, bank z‐score and the real output growth are positive determinants of bank regulatory capital. Conversely, bank return on assets is found to be a negative determinant. After constructing an index for profitability using the approach of the component analysis, the empirical result reveals an inverse relationship between bank profitability and the regulatory minimum capital. Diagnostic tests and robustness checks confirm the empirical consistency of the findings reported. Thus, in applying the panel pairwise causality test, the evidence of bi‐directional Granger causality suggests a feedback relationship for five significant scenarios and unidirectional nexus in others. For policy consideration, the results stressed the need for optimal due diligence weighing the benefit and cost implication of upward or downward adjustment of bank regulatory minimum capital.