Effects of banking regulation on the performance of the banking sector: Evidence of banks in the Western Balkans

Abstract

The main objective of this quantitative study is to examine the relationship between the following independent variables: capital adequacy ratio (CAR), liquid assets to total assets (LATA) and bank size (BS) and dependent variables: return on assets (ROA), credit worthiness indicator (Zscore) and return on equity (ROE) for selected Western Balkan bank countries. This model was estimated using a panel data methodology based on the assumption of a fixed and a random effect as decided in the Hausman test. The results showed that the variable size of the bank (BS) has a positive effect on the return on assets of banks in the Western Balkans, while the variable liquid assets to total assets (LATA) and capital adequacy ratio (CAR) have a negative impact. The results also showed that the variable share of liquid assets in total assets has a positive impact on the creditworthiness indicator of banks in the Western Balkans (ZScore). The third result is the variable return on equity (ROE) and it had the strongest positive impact with the independent variable size of the bank.