An Econometric Analysis of Applying Capital Adequacy on the Profit of Commercial Banks: A Case Study of Jordan

Saud Musa Altayeb, Mohammed Issa Shahateet


This study aims at measuring the impact of applying Capital Adequacy Law on the profit of commercial banks in Jordan. Since commercial banks work in risky environment, they were pushed to apply capital adequacy, which is usually considered an international measure, for boosting profit and financial safety. This study attempts to answer the following question: "Did this increase in capital affect the profit of these banks?" To answer this question, the study used econometric analysis based on analyzing a panel data consisting of 12 profit ratios for 15 commercial banks during 2000-2007, totalling 1440 observation. Obviously, the study avoided using 2008 data because of the recent World Financial Crisis. The study concludes that the introduction of capital adequacy law either had no significant effect or had a negative effect on profitability of commercial banks. Among the twelve profit ratios only three were positively affected by the increment in capital.


Capital adequacy, Profit of banks, Jordan

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