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The Impact of Capital Requirements on Banks’ Cost of Intermediation and Performance: The Case of Egypt

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  • Magda Kandil

    ()
    (International Monetary Fund)

  • Samy Ben Naceur

Abstract

In 1991, the Central Bank of Egypt increased the minimum capital requirements for the banking industry vis-à-vis risk-weighted assets to 8 percent, along the lines proposed by the Basel Committee on Banking Supervision. In this paper, we investigate the effects of capital regulations on cost of intermediation and profitability. Higher capital adequacy increases the interest of shareholders in managing banks’ portfolios. The result is a higher cost of intermediation and profitability. A number of factors have increased the cost of intermediation in the post-capital regulation period: higher capital-to assets ratios, an increase in management efficiency, an improvement of liquidity and a reduction in inflation. The reduction in output growth countered these effects. In the meantime a number of factors contributed positively to banks’ profitability in the post-regulation period: higher capital requirements, the reduction in implicit cost and the increase in management efficiency. The reduction in economic activity had opposite effects on banks’ profitability. Overall, the results support the Central Bank’s efforts to enforce capital regulations to improve the performance of the banking sector in Egypt.

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Bibliographic Info

Paper provided by Economic Research Forum in its series Working Papers with number 430.

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Length: 26 pages
Date of creation: Aug 2008
Date of revision: Aug 2008
Publication status: Published by The Economic Research Forum (ERF)
Handle: RePEc:erg:wpaper:430

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Citations

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Cited by:
  1. Soedarmono, Wahyoe & Tarazi, Amine, 2013. "Bank opacity, intermediation cost and globalization: Evidence from a sample of publicly traded banks in Asia," Journal of Asian Economics, Elsevier, vol. 29(C), pages 91-100.
  2. Sami Ben Naceur & Magda E. Kandil, 2013. "Basel Capital Requirements and Credit Crunch in the MENA Region," IMF Working Papers 13/160, International Monetary Fund.
  3. Wahyoe Soedarmono & Philippe Rous & Amine Tarazi, 2011. "Bank Capital and Self-Interested Managers: Evidence from Indonesia," Working Papers hal-00918584, HAL.
  4. Jean-Yves MOISSERON & Bruno-Laurent MOSCHETTO & Frédéric TEULON, 2014. "Islamic finance a review of the literature," Working Papers 2014-093 Keywords : Islam, Department of Research, Ipag Business School.
  5. Monal Abdel-Baki, 2011. "The efficacy of the Egyptian bank reform plan in mitigating the impact of the global financial crisis," Economic Change and Restructuring, Springer, vol. 44(3), pages 221-241, August.
  6. Amel Belanes & Afef Ben Hajiba, 2012. "Regulation and risk taking in the banking industry: evidence from Tunisia," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 3(1), pages 89-104.

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