BASEL III TIER 1 CAPITAL RATIO, LEVERAGE RATIO, AND BANK PROFITABILITY EVIDENCE FROM NIGERIA

Abstract

This paper investigates the impact of Basel III Tier 1 Capital Ratio and Leverage Ratio on the profitability of banks in Nigeria, focusing on the period from 2009 to 2020. The Basel III framework, introduced to enhance the resilience of banks through stricter capital requirements, has generated interest in how these regulations affect bank performance, particularly profitability. Using a Regression Discontinuity Design (RDD), data from 14 banks were analyzed to assess the effect of these regulatory capital measures on two key profitability metrics: Return on Equity (ROE) and Return on Assets (ROA). The results reveal that both the Tier 1 Capital Ratio and Leverage Ratio have a significant positive impact on ROE, indicating that higher levels of core capital and more efficient leverage management enable banks to generate superior returns for shareholders. However, the impact of both the Tier 1 capital and leverage ratios on ROA is found to be statistically insignificant, suggesting that while these regulatory measures may boost equity returns, they do not necessarily enhance the overall efficiency of bank assets in generating returns. These results highlight the effects of Basel III capital requirements on different dimensions of bank profitability and underscore the importance of capital structure in enhancing shareholder value, without necessarily affecting operational efficiency. The paper’s findings suggest that regulatory bodies should continue to enforce the Tier 1 Capital and Leverage ratios, as they enhance shareholder value. Additionally, bank management should consider capital structure optimization strategies to strengthen ROE and focus on other operational improvements to drive asset efficiency. This study contributes to the ongoing discourse on the effectiveness of Basel III capital and leverage requirements in promoting the profitability of banks in an emerging market context, particularly in Nigeria, where the banking sector is highly regulated and faces distinct economic challenges.