Impact of Capital Adequacy on Profitability Under Basel II Accord: Evidence from Commercial Banks of Bangladesh

Abstract

This paper explores the effect of several bank specific variables including capital adequacy on the profitability of listed commercial banks operating in Bangladesh. Determinants of banks’ profitability like ROA and ROE have been assessed by the panel data (232 observations) of 29 listed banks out of 30, for the time period of eight years (2007-2014). These sample banks cover approximately 62% of total banking sector asset in the year 2014 in Bangladesh. In this study, profitability has been quantified in terms of regulatory capital, operating efficiency, bank’s asset size, loan structure and leverage. This study found that the regulatory capital held by banks is greater than the minimum capital requirement guided under Basel II accord. Again, it has been showed that explanatory variables like capital adequacy, operating efficiency and loan structure are positively related to profitability of a bank.

Keywords: Basel II, bank profitability dimension, Bangladesh.