THE INFLUENCE OF CAPITAL RATIO ON FIRM PERFORMANCE OF THE LOCAL AND FOREIGN BANKS IN MALAYSIA

Abstract

Based on data of 26 local and foreign commercial banks during 2013-2017, this paper analyzes the influence of capital ratio on the performance of the local and foreign banks. (1) The bank performance measured by Return on assets and Return on equity and the capital ratio measured by equity to total assets ratio, tier 1 ratio and total capital ratio; (2) the capital ratio of Malaysia commercial banks and the profitability are significantly and negatively correlated on the whole, which is mainly driven by city commercial banks and shows tier 1 ratio has not significant relationship; the relationship between the capital ratio and bank performance should be paid more attention.

Therefore, financial regulators should implement differential capital supervision according to bank capital ratio so as to make use of the function of capital to profitability.