Abstract
The financial performance of commercial banks can be credibly appraised through internal bank-specific variables that are mostly within management control, and external macroeconomic variables which explain the environment that the banks operate in. Commercial banks thus remain competitive if they are able to generate a return through a constant pursuit of profitable activities, whilst efficiently servicing their customers and contributing to a sustainable and safe banking sector. Underpinning the micro and macroeconomic principles that shape commercial banks is a sound regulatory and legal framework. The evolution of regulation in the banking sector, particularly the compliance with Basel’s minimum capital requirements has induced academic scholars, bank managers and regulators to examine the impact of regulation on a bank’s financial performance. This study further expands on this trend by examining the impact of Basel capital adequacy requirements on the profitability of banks listed on the Johannesburg Stock Exchange (JSE). The research employed a quantitative approach using a Panel data regression model, sampling 9 JSE listed banks that are locally controlled as reported by the South African Reserve Bank (SARB). The selected banks jointly account for more than 93% of South Africa’s banking total assets, thus constituting a satisfactory representation of the South African commercial banking sector. Return on average asset (ROAA), return on average equity (ROAE) and net interest margin (NIM) were measures used as proxies for bank performance, and the Basel total capital adequacy ratio (TCAR) was used as the explanatory variable. The study used published annual time series data from the financial statements of the selected listed banks from 2007 to 2019, a 13-year view covering all regulatory waves including Basel III, which was introduced as a remedial framework response to the 2007-2009 global financial crisis. The empirical results in this study evidenced that well capitalised South African banks, measured by Basel regulatory capital requirements, achieved positive results. Total capital adequacy ratio was found to be a statistically significant explanatory variable of South African bank’s profitability measured by ROAA, ROAE and NIM. Key words Basel I, II and III, Basel Capital Adequacy, Minimum Capital Requirements, Bank Profitability, Bank Performance, South African Banking Sector, Johannesburg Stock Exchange listed banks, Risk-based capital ratios.
M.Com. (Financial Management)