Efficacy assessment of risk metrics for Banks

Abstract

A country's banking system plays a central role in its economic development. Banks fulfil a basic purpose of collecting excess capital from country's citizens, citizen groups, organizations, and other institutions; and lending this to other groups who need capital. Through this basic operation of capital redirection, banks stimulate the growth of economy by facilitating investment for private ventures, fuel private corporation's growth & expansion plans as well as well fund various government projects & initiatives. Banking systems play an important role in international trade by serving as link between country's financial system to foreign markets. Such is the importance of banking system - that it has dominated academic, political and public discourse ever since our nation's independence. It would not be an understatement to say that a failed banking system can cripple the entire economy by freezing the credit flow; while a healthy and robust banking system can result in countless green shoots for the economy by nurturing enterprise, businesses and investments. Given such importance, it isltly imperative that banking sector operates under strict regulatory framework - with elaborate system of checks and balances at every step to prevent any intended or unintended bank failure. The primary responsibility of formulating and enforcing regulations rests with the Reserve Bank oflndia. Over the years, it has put in place various regulations and rules to check systemic risk-taking behavior and financial misconduct. Various prudential measures are used by banks to assess their risks. These include capital ratio, leverage ratio, and liquidity standards. These metrics are established to achieve greater stability of the economy while promoting growth through credit distribution. But there is an opportunity cost associated with such risk control measures as reserve capital is not available for credit disbursal. Therefore, it is important to gauge the efficacy and effectiveness of prudential metrics set forth by regulators and analyze how changing market conditions might affect changes in the risk-control measures. Throug ur study, we have tried to assess the impact of prominent BASEL ill regulation and identify determinants of Capital Adequacy Ratio (CAR) and assess the relationship of the different bank performance variables such as: loan-deposit ratio, ROA, asset size etc. as well as macro variables such as: GDP, inflation, credit growth etc. with CAR.