Abstract:

The analysis of a data set of observation for 10 banks in period of 6 years in B&H shows how Capital Adequacy Ratio (CAR) is influenced by many factors such as: capital structure, size of the bank, profitability indicators, participation of deposits and loans in total asset, and leverage.  Selected variables are chosen on the previous research and analysis is done through several methods and some diagnostics tests are performed in order to determine the most appropriate model that explains determinants of CAR. Results indicate based on data that SIZE, DEP, LOA, ROA, ROE AND LEV have significant effect on CAR. On the other hand LLR and NIM do not appear to have significant effect on CAR. Variables SIZE, DEP, LOA and ROA have negative effect on CAR, while variables LLR, ROE, NIM and LEV are positively related with CAR. All variables except LOA and ROA have expected signs. It is hard to distinguish which CAR is better higher or lower, form stability aspect it is better to have higher CAR, but from profitability side lower CAR is more preferable, so the banks should decide based on this study which variable to use in order to reach targeted CAR level.

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