Analysis of Factors Affecting the Capital Adequacy Ratio in the Turkish Banking Sector

Abstract

The banking sector performs financial intermediation transactions in accordance with its basic function. Factors such as the diversification of financial products and rapid change in technology cause changes in the structure of the banking sector while also revealing the different types of risks. With regard to bank risk and profitability management, it is vital that capital structures are at such a level as to meet the risks. The adequacy and strength of the capital structures in banks are the basic conditions for the functioning of the system and the establishment of trust. Keeping this ratio at certain levels and ensuring continuity in this value is very important for banks to work effectively and efficiently. The study aims to determine the long-term relationships of factors affecting the capital adequacy ratio (CAR) with the help of Westerlund and Edgerton (2007) LM Bootstrap panel cointegration test for commercial (deposit), development and investment and Islamic banking groups with the annual data for the 2010–2020 period in Turkish banking sector. As a result of the analysis of the three bank groups, it was determined that the total assets, liquidity adequacy ratio, and equity/total risk-weighted item ratios positively affected the capital adequacy ratio, and the market risk and nonperforming loan (NPL)/total cash loan ratios were statistically significantly affected. Furthermore, the coefficiency of the error correction term was negative and statistically significant, and the error correction mechanism was seen to be working. The most effective variable on capital adequacy was seen as the liquidity adequacy ratio. © 2022, The Author(s), under exclusive license to Springer Nature Switzerland AG.