Effects of Banks’ Free Capital on Performance in Light of the 2008 Financial Crisis: Evidence from the GCC Region

摘要

The purpose of this paper is to investigate the validity of the free cash to risk assets ratio (FCRAR) to predict some bank performance indicators, including, but not limited to, risk and return. This is a proposed alternative to the Basel accords’ capital adequacy measure which failed to predict bank insolvency, especially at times of economic downturn. Data were collected for the banking industry in the Gulf Cooperation Council of Arab Countries (GCC) region for the period from 2004-2013 to study the effect before and after the 2008 global financial crisis. Nonparametric mean rank tests and general linear model (GLM) with panel regression were used to investigate the predictability power of the proposed capital adequacy ratio. Our results provided evidence of FCRAR ability to predict changes, with the expected signs, for all bank performance indicators, before and after the crisis, except for the overall bank risk. As a result, we call upon scholars to keep the quest for a better capital adequacy measure that can monitor and predict bank insolvency. Bankers are advised to strive to strengthen their capital positions and not to depend totally on regulators-proposed measures to be able to prevent financial distress. The originality of this paper is drawn from the wider data covering a whole region of countries and the newly proposed alternative of capital adequacy measure.