Abstract

Capital adequacy is a crucial factor in determining the level of risk absorption of a banking institution. This issue has been discussed widely as it is an important yardstick to gauge the complete picture of banking performance. Capital adequacy is closely related to the economic performance of related country, therefore, this study investigates the financial performance and economic impact of capital adequacy ratio on regional banks in Japan. Five variables were employed that represent economic performance - unemployment rate, inflation rate, real exchange rate, money supply and gross domestic product, while financial performance of the regional banks consisted of six variables, namely the deposit-to-asset ratio, return on assets, return on equity, total assets, total deposits and total loans. 64 regional banks were evaluated over a period of 10 years from 2005 to 2014. Secondary data were composed of World Bank data and the individual financial statements of Japanese regional banks. The results show a various signs of relationships between variables and it was slightly different from previous study. This was supported by result tested by panel regression analysis and correlation analysis conducted in order to measure the relationship between capital adequacy and each variable. This paper among others gives a vast reference to depositor, banking institution and policy maker in not only maintaining but also need to improve the level of capital adequacy for a stable security to all parties.

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