Study of optimal capital adequacy ratios

Yang Li, Yi-Kai Chen, Feng Sheng Chien (), Wen Chih Lee and Yi Ching Hsu
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Yang Li: National University of Kaohsiung
Feng Sheng Chien: National Sun Yat-sen University
Wen Chih Lee: National Kaohsiung University of Applied Sciences
Yi Ching Hsu: Ta Chong Bank

Journal of Productivity Analysis, 2016, vol. 45, issue 3, No 3, 274 pages

Abstract: Abstract In response to international financial developments after the global financial tsunami in 2008, the Bank for International Settlements (BIS) proposed Basel III in 2010, whereby banks have to increase their minimum capital adequacy ratios year by year with a goal of 10.5 % by 2019. This study looks to answer two questions: (1) Is the capital adequacy ratio of 8 % required by Basel II too low to guide banks moving toward the efficiency frontier? (2) Is Basel III’s target capital adequacy ratio of 10.5 % in 2019 so strict that it might impact banks’ efficiency? The dataset herein consists of thirty-one Taiwan commercial banks over the period 2007–2009 for a total of ninety-three observations. The empirical results indicate that as many as 93.5 % of the banks have an optimal capital adequacy ratio greater than the 8 % regulation in Basel II. Approximately 88.2 % of the banks have an optimal capital adequacy ratio higher than 10.5 %. In addition, nearly 73 % of the banks should raise their BIS ratios in order to achieve the optimal BIS ratios. Hence, higher BIS ratios required by Basel III may pilot the Taiwan banking industry to reach the efficiency frontier.

Keywords: Bank efficiency; Basel II; Basel III; Capital adequacy ratios; Two-stage DEA (search for similar items in EconPapers)
JEL-codes: D24 G21 G28 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s11123-016-0469-z

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