Determinants of the Capital Adequacy of U.S Financial Institutions

Melita Charitou


In this study we examine the determinants of the capital adequacy ratios of the US financial institutions over the period 2012-2017. Using a dataset of 2135 bank-year observations,  results show that financial institutions with high operating expenses as a percentage of revenues have lower capital adequacy ratios. This is an indication that bank inefficiencies are an impediment to robust capital adequacy ratios. Moreover, results show that more profitable banks have higher CARs. Evidence shows that additional two risk related variables affect positively CARs, namely, earnings coverage of net charge off and loss allowance to loans. These results should be of great importance to bank executives, bank regulators and to major stakeholders such as investors and financial analysts, especially after the latest global financial crisis and the collapse of giant US financial institutions.

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