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

Pierre Durand ()
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Pierre Durand: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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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)
Date: 2019
Note: View the original document on HAL open archive server: https://hal.science/hal-04141855
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