Determinants of Bank Profitability and Basel Capital Regulation: Empirical Evidence from Nigeria

Abstract

This study, empirically, investigates the determinants of bank profitability. The debate on whether Basel capital regulation affects bank profitability continues to attract research interest, globally. I contribute to this debate by providing a country specific study. Overall, I find that Basel capital regime had no significant effect on bank profitability. The result is significant because it lends support to the view that modified Basel accord in different countries might be aimed to meet other prudential objectives relative to the intended objective - to reduce excessive bank risk-taking. Second, after employing NIM and ROA profitability metrics, I find that the determinants of bank profitability, and its significance, depends on the profitability metric employed. Third, I find that loan quality significantly influences bank interest margin while bank size and cost efficiency significantly influences return on asset. Finally, bank capital adequacy ratio is observed to be a significant determinant of bank profitability.

Keywords: Bank Profitability, Performance, Basel, Return on Asset, Net Interest Margin, Bank Regulation

JEL Classification: G21, G38