The effect of capital adequacy ratio to bank performance of the commercial banks in the Philippines using the CAMEL rating model

• Main Author: Pangapalan, Jona Lumbao
• Format: text
• Language: English
• Published: Animo Repository 2011
• Subjects: Banks and banking; Business
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/4093; https://animorepository.dlsu.edu.ph/context/etd_masteral/article/10931/viewcontent/CDTG005078_P.pdf
• Institution: De La Salle University

The CAMEL (stands for capital adequacy asset quality management quality earning ability and liquidity) Rating System is one of the various measures used in assessment of bank performance. Literature is rich with studies on how capital affects bank performance. CAMEL however considers capital adequacy as part of the overall bank performance. The study considered capital adequacy as a separate variable which affects bank performance as represented by the other variable in CAMEL. The study also differentiated the effects of capital adequacy to bank performance when represented by the unweighted equity-asset-ratio and the risk-based capital adequacy ratio. The study found that among the capital adequacy affects earning ability and liquidity. Based on the empirical results, increasing capital without consideration as to the type of capital or the risk-weight of asset that capital will fall unto may be a blind move towards improving bank performance. Improving Tier 1 capital may deteriorate bank performance in terms of liquidity and may improve no other category. However, being a regulatory requirement in the Philippines, banks should maintain their Tier 1 capital adequacy ratio at minimum. As for Tier 2 capital adequacy ratio, which can improve bank performance in terms of two categories should be explored and be maximized, depending on the risk that a given bank is willing to take.