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Determinants of banks' profitability: Do Basel III liquidity and capital ratios matter?

Pierre Durand

No 2019-24, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: 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
Date: 2019
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cfn and nep-rmg
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