Abstract

The study applied fixed effect panel estimation analysis to investigate into capital adequacy behavior of banking industry of Pakistan over the period 2004 to 2009, under numerous regulatory stresses particularly when there is contemporary global crisis embryonic around the world. The emphasis in this paper will be to explore exactly how institutions react to the regulatory capital requirements changes. We found a positive and statistically significant association between return on assets and capital ratio. This pertains to the fact that in order to upturn capital, banks depends more on retained earnings. Another important finding of this study is that the certain features of the bank serves as significantly important factors for a bank response to changing capital requirement such as size (SIZE) has a statistically significant and a negative effect on capital, means that bigger banks are less inclined towards increasing capital as compare to small banks. A likely elucidation for this can be that big banks have easy and better access to the bond market. The relation between risk weighted capital ratio and regulatory pressure is positive and significant, as it implies that banks under regulatory pressure will prefer into less risky ventures. This in turn reduces the chances of bank failure and failure of speculative activities thus reducing the social and economic costs arising from such failures.

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