Determinants of banks' profitability: Do Basel III liquidity and capital ratios matter?
No 2019-24, EconomiX Working Papers from University of Paris Nanterre, EconomiX
In this paper, we investigate the role played by the TCR and LCR among determinants of banks' profitability. To this end, using Random Forest regressions and a large dataset of banks' balance sheet variables, we assess the impact and predicting power of Basel III capital and liquidity ratios. Our results confirm the trade-off theory of the capital structure: banks have an optimal capital ratio below which the relation between capital and profitability is positive. On average, this optimum falls between 15% and 20%. Furthermore, we show that LCR has a positive, but weak, effect on profitability. Overall, our findings illustrate the fact that regulatory ratios do not constitute binding conditions for banks' performance.
Keywords: Basel III; Capital ratio; Liquidity ratio; Banks' profitability; Random Forest regressions. (search for similar items in EconPapers)
JEL-codes: C44 G21 G28 (search for similar items in EconPapers)
Pages: 32 pages
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cfn and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2019-24
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