Panel Data Regression Model Essay

During the study, panel data regression model which will be used to do testing of the data. In order to determine the impact of Basel III theory on capital adequacy in banking sector in Mauritius, below test is interpreted using regression model. Capital adequacy ratio will represent the dependent variable and the independent variables will be as follows: return on asset ratio, return on equity ratio, loan to deposit ratio, debt over leverage ratio, capitalization ratio, rate of interest

CRAR it = β0 + β1 ROAit + β2 ROEit + β3 LDRit + β4 LRit + β5 ROIt + β6 CAPRit + μit

Where μit  NID (0,2), that is μit is assumed to be normally and independently distributed with constant variance and zero mean. μ is the error term , β0 is the intercept

It is also known as capital to risk (weighted) Assets Ratio (CRAR).Banks needs to comply in accordance to Basel III theory by maintaining minimum capital requirements. Banks is required to have minimum capital ratio so that banks have enough capital to absorb a sufficient amount losses before they become insolvent. This measure helps banks from reducing the risk of becoming insolvent. If a bank become insolvent due to high leveraged or indebted, this reduces the level of confidence of depositors, investors and the public in an

It measures the level of assets which is financed by creditors and the portion of assets which is financed by shareholders. It shows the remaining amount of equity that will remain after all liabilities are paid off. Equity ratio test the soundness of the capital structure of a firm. A higher equity ratio shows that a firm is in a good solvency position whereas a lower equity ratio shows that a firm is in financial difficulties which represents losses and high risks for creditors.

Equity Ratio = Net Income Equity

4.5.4 Loan to deposit ratio (LDR)

Loan to deposit ratio measures a bank’s total loan over total deposits. This ratio is used to assess the liquidity position of a bank. There are some types of banks who rely on its own deposits to give loans to its new customers without taking any borrowing outside the institution therefore its loan to deposit ratio will be less than one. On the other hand, we have that type of banks which will take borrowing outside and it will reloan same to customers at higher interest rates. Here the ratio will be greater than one. It has been studied that when a banking institution ratio is too low, it does not mean that the bank is earning an optimal return and when the ratio is too high due to banks getting liquidity