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J. Risk Financial Manag. 2017, 10(2), 9; doi:10.3390/jrfm10020009

Capital Regulation, the Cost of Financial Intermediation and Bank Profitability: Evidence from Bangladesh

1
School of Management, Huazhong University of Science and Technology, Wuhan 430074, China
2
International School, East China Jiao Tong University, Nanchang 330013, China
*
Author to whom correspondence should be addressed.
Academic Editor: Terence Tai-Leung Chong
Received: 31 December 2016 / Revised: 10 April 2017 / Accepted: 12 April 2017 / Published: 17 April 2017
(This article belongs to the Special Issue Financial Stability and Regulation / Basel III)
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Abstract

In response to the recent global financial crisis, the regulatory authorities in many countries have imposed stringent capital requirements in the form of the BASEL III Accord to ensure financial stability. On the other hand, bankers have criticized new regulation on the ground that it would enhance the cost of funds for bank borrowers and deteriorate the bank profitability. In this study, we examine the impact of capital requirements on the cost of financial intermediation and bank profitability using a panel dataset of 32 Bangladeshi banks over the period from 2000 to 2015. By employing a dynamic panel generalized method of moments (GMM) estimator, we find robust evidence that higher bank regulatory capital ratios reduce the cost of financial intermediation and increase bank profitability. The results hold when we use equity to total assets ratio as an alternative measure of bank capital. We also observe that switching from BASEL I to BASEL II has no measurable impact on the cost of financial intermediation and bank profitability in Bangladesh. In the empirical analysis, we further observe that higher bank management and cost efficiencies are associated with the lower cost of financial intermediation and higher bank profitability. These results have important implications for bank regulators, academicians, and bankers. View Full-Text
Keywords: cost of intermediation; profitability; capital regulation; cost inefficiency; GMM estimation cost of intermediation; profitability; capital regulation; cost inefficiency; GMM estimation
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MDPI and ACS Style

Zheng, C.; Rahman, M.M.; Begum, M.; Ashraf, B.N. Capital Regulation, the Cost of Financial Intermediation and Bank Profitability: Evidence from Bangladesh. J. Risk Financial Manag. 2017, 10, 9.

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