The Relationship between capital adequacy and profitability under Basel III in the Namibian banking sector
- Authors: Pomuti, Esther Kaulinawa
- Date: 2021-10-29
- Subjects: Banks and banking Namibia , Banks and banking, International Law and legislation , Bank capital Law and legislation Namibia , Rate of return Namibia , Basle Committee on Banking Supervision , Ratio analysis , Basel III (2010)
- Language: English
- Type: Master's theses , text
- Identifier: http://hdl.handle.net/10962/191909 , vital:45178
- Description: Globally, capital adequacy is one of the most central topics for both regulatory authorities and banks. It promotes stability and intends to reduce bank insolvency. It also represents the most important element of banks’ profitability (Profits are the first line of defense against losses from credit loss in a bank). After the collapse of Bretton Woods in 1973, many banks incurred large foreign currency losses, with Banks outside Germany having taken heavy losses on their unsettled trades with Herstatt Bank in Cologne, West Germany, when it collapsed in June 1974. This study empirically tests the relationship between changes in the capital adequacy ratio under Basel III and return on equity (ROE) of the Namibian banking sector and whether such relationships exist in the short run or long run. The study used panel quarterly data for a sample of three Namibian commercial banks from the year 1999 to 2019.It employed one panel unit root tests namely: Im, Pesaran and Shin W-stat (IPS). To test the existence of a long-run relationship (equilibrium) or effect between the dependent and independent variables, the study employed the Panel Co-integration methods using Pedroni and Kao (Engle-Granger based) tests. The study carried out the Hausman test to determine the best approach for analysis and determined the PMG approach to be the preferable model for analysis. Various diagnostic tests such as multicollinearity through the correlation analysis, autocorrelation, and heteroscedasticity and cross-sectional dependence tests were carried out to determine if the data set is well-modelled and if the results can be taken seriously. The study’s results under the PMG model showed that ROE and CAR have a positive significant relationship in the short run. A dummy variable to capture the connection between ROE and CAR before and after BASEL III shows that the relationship is positive and significant indicating that ROE increases more when there is capital regulation than when there is no capital regulation. The study also concluded that there is no long run relationship between CAR and ROE. Finally, the interaction effect between the dummy variable and CAR is negative but significant and thus indicating that the positive relationship does not persist post Basel III. , Thesis (MCom) -- Faculty of Commerce, Economics and Economic History, 2021
- Full Text:
- Date Issued: 2021-10-29
- Authors: Pomuti, Esther Kaulinawa
- Date: 2021-10-29
- Subjects: Banks and banking Namibia , Banks and banking, International Law and legislation , Bank capital Law and legislation Namibia , Rate of return Namibia , Basle Committee on Banking Supervision , Ratio analysis , Basel III (2010)
- Language: English
- Type: Master's theses , text
- Identifier: http://hdl.handle.net/10962/191909 , vital:45178
- Description: Globally, capital adequacy is one of the most central topics for both regulatory authorities and banks. It promotes stability and intends to reduce bank insolvency. It also represents the most important element of banks’ profitability (Profits are the first line of defense against losses from credit loss in a bank). After the collapse of Bretton Woods in 1973, many banks incurred large foreign currency losses, with Banks outside Germany having taken heavy losses on their unsettled trades with Herstatt Bank in Cologne, West Germany, when it collapsed in June 1974. This study empirically tests the relationship between changes in the capital adequacy ratio under Basel III and return on equity (ROE) of the Namibian banking sector and whether such relationships exist in the short run or long run. The study used panel quarterly data for a sample of three Namibian commercial banks from the year 1999 to 2019.It employed one panel unit root tests namely: Im, Pesaran and Shin W-stat (IPS). To test the existence of a long-run relationship (equilibrium) or effect between the dependent and independent variables, the study employed the Panel Co-integration methods using Pedroni and Kao (Engle-Granger based) tests. The study carried out the Hausman test to determine the best approach for analysis and determined the PMG approach to be the preferable model for analysis. Various diagnostic tests such as multicollinearity through the correlation analysis, autocorrelation, and heteroscedasticity and cross-sectional dependence tests were carried out to determine if the data set is well-modelled and if the results can be taken seriously. The study’s results under the PMG model showed that ROE and CAR have a positive significant relationship in the short run. A dummy variable to capture the connection between ROE and CAR before and after BASEL III shows that the relationship is positive and significant indicating that ROE increases more when there is capital regulation than when there is no capital regulation. The study also concluded that there is no long run relationship between CAR and ROE. Finally, the interaction effect between the dummy variable and CAR is negative but significant and thus indicating that the positive relationship does not persist post Basel III. , Thesis (MCom) -- Faculty of Commerce, Economics and Economic History, 2021
- Full Text:
- Date Issued: 2021-10-29
The value of economic capital as an indicator to protect prospective and existing ordinary shareholders
- Authors: Chonzi, Tendai Day
- Date: 2020
- Subjects: Banks and banking -- Risk management -- South Africa , Financial services industry -- Risk management -- South Africa , ABSA Bank , FirstRand Limited , Nedbank , Standard Bank Limited , Capitec Bank (South Africa)
- Language: English
- Type: text , Thesis , Masters , MCom
- Identifier: http://hdl.handle.net/10962/145807 , vital:38468
- Description: South Africans banking sector is one of the most dominating banking sectors in Africa. The banking sector is privately owned and involves a lot of different stakeholders, who risk losing their investments. One of the stakeholders who are the bottom of the repayment chain are existing ordinary shareholders because they risk losing all their investment in the result of bankruptcy, liquidity crises or the inability of the bank to repay their shareholders. Regulators in the banking sector only protect the depositor and the stability of the banking sector but not ordinary shareholders. An internal supervisory measure called economic capital has recently received more attention because of its aim to protect ordinary shareholders and thus, existing and prospective shareholders can use its value as a protective indicator. Economic theory assumes that the higher the value of economic capital (the lower the economic capital shortfall), the lower the return on investment for existing ordinary shareholders. The aforementioned shows a trade-off between protection (economic capital) and returns. Literature by Larsson (2009) further suggests that banks are always reluctant with implementing internal measures to protect themselves because of the good regulatory regime in the sector, some banks think that they are “too big to fail” and the fact that the reserve banks are always on the standby as a bailout. The purpose of this research is to examine which of the top five commercial banks in South African actively protect their existing ordinary shareholders using the value of economic capital and possibly attract prospective ordinary shareholders, locally and internationally. The banks under study are Absa, Capitec, FirstRand, Nedbank and Standard Bank over ten years, starting from June 2009 to May 2019 and in monthly frequency. The observations totalled 120 and two models that are under the Return Series Method were in used, namely; Historical Simulation Model and Variance Covariance Model. Both models, although they were small deviations in the value of economic capital, concluded that Standard Bank protects its existing ordinary shareholders the most, followed by FirstRand, then Absa and last is Nedbank. Capitec was the only bank, after one financial shock that could not protect its existing ordinary shareholders. Moreover, evidence in the study shows a trade-off between economic capital and return on investment in the case of Capitec and Standard Bank. Standard Bank had the highest value of economic capital and second-lowest return on investment, while Capitec had the highest return on investment and lowest value of economic capital. The significant policy implication of the research is that financial institution needs to strike a balance between protection and profits; thus, a way of protecting various stakeholders. Financial shocks have proven that regulatory measures are weak and they are is need for internal measures (economic capital) which indicate how financial institution can sustain in such cases.
- Full Text:
- Date Issued: 2020
- Authors: Chonzi, Tendai Day
- Date: 2020
- Subjects: Banks and banking -- Risk management -- South Africa , Financial services industry -- Risk management -- South Africa , ABSA Bank , FirstRand Limited , Nedbank , Standard Bank Limited , Capitec Bank (South Africa)
- Language: English
- Type: text , Thesis , Masters , MCom
- Identifier: http://hdl.handle.net/10962/145807 , vital:38468
- Description: South Africans banking sector is one of the most dominating banking sectors in Africa. The banking sector is privately owned and involves a lot of different stakeholders, who risk losing their investments. One of the stakeholders who are the bottom of the repayment chain are existing ordinary shareholders because they risk losing all their investment in the result of bankruptcy, liquidity crises or the inability of the bank to repay their shareholders. Regulators in the banking sector only protect the depositor and the stability of the banking sector but not ordinary shareholders. An internal supervisory measure called economic capital has recently received more attention because of its aim to protect ordinary shareholders and thus, existing and prospective shareholders can use its value as a protective indicator. Economic theory assumes that the higher the value of economic capital (the lower the economic capital shortfall), the lower the return on investment for existing ordinary shareholders. The aforementioned shows a trade-off between protection (economic capital) and returns. Literature by Larsson (2009) further suggests that banks are always reluctant with implementing internal measures to protect themselves because of the good regulatory regime in the sector, some banks think that they are “too big to fail” and the fact that the reserve banks are always on the standby as a bailout. The purpose of this research is to examine which of the top five commercial banks in South African actively protect their existing ordinary shareholders using the value of economic capital and possibly attract prospective ordinary shareholders, locally and internationally. The banks under study are Absa, Capitec, FirstRand, Nedbank and Standard Bank over ten years, starting from June 2009 to May 2019 and in monthly frequency. The observations totalled 120 and two models that are under the Return Series Method were in used, namely; Historical Simulation Model and Variance Covariance Model. Both models, although they were small deviations in the value of economic capital, concluded that Standard Bank protects its existing ordinary shareholders the most, followed by FirstRand, then Absa and last is Nedbank. Capitec was the only bank, after one financial shock that could not protect its existing ordinary shareholders. Moreover, evidence in the study shows a trade-off between economic capital and return on investment in the case of Capitec and Standard Bank. Standard Bank had the highest value of economic capital and second-lowest return on investment, while Capitec had the highest return on investment and lowest value of economic capital. The significant policy implication of the research is that financial institution needs to strike a balance between protection and profits; thus, a way of protecting various stakeholders. Financial shocks have proven that regulatory measures are weak and they are is need for internal measures (economic capital) which indicate how financial institution can sustain in such cases.
- Full Text:
- Date Issued: 2020
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