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Capital Regulation, the Cost of Financial Intermediation and Bank Profitability: Evidence from Bangladesh

Changjun Zheng (), Mohammed Mizanur Rahman (), Munni Begum () and Badar Nadeem Ashraf
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Changjun Zheng: School of Management, Huazhong University of Science and Technology, Wuhan 430074, China
Mohammed Mizanur Rahman: School of Management, Huazhong University of Science and Technology, Wuhan 430074, China
Munni Begum: School of Management, Huazhong University of Science and Technology, Wuhan 430074, China

Journal of Risk and Financial Management, 2017, vol. 10, issue 2, 1-24

Abstract: In response to the recent global financial crisis, the regulatory authorities in many countries have imposed stringent capital requirements in the form of the BASEL III Accord to ensure financial stability. On the other hand, bankers have criticized new regulation on the ground that it would enhance the cost of funds for bank borrowers and deteriorate the bank profitability. In this study, we examine the impact of capital requirements on the cost of financial intermediation and bank profitability using a panel dataset of 32 Bangladeshi banks over the period from 2000 to 2015. By employing a dynamic panel generalized method of moments (GMM) estimator, we find robust evidence that higher bank regulatory capital ratios reduce the cost of financial intermediation and increase bank profitability. The results hold when we use equity to total assets ratio as an alternative measure of bank capital. We also observe that switching from BASEL I to BASEL II has no measurable impact on the cost of financial intermediation and bank profitability in Bangladesh. In the empirical analysis, we further observe that higher bank management and cost efficiencies are associated with the lower cost of financial intermediation and higher bank profitability. These results have important implications for bank regulators, academicians, and bankers.

Keywords: cost of intermediation; profitability; capital regulation; cost inefficiency; GMM estimation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2017
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