Abstract:
Abstract: This paper aims at identifying the contributing factors to the solvency
condition of selected commercial banks of Bangladesh and to propose a model that
can be utilized to identify insolvency of the banks. The assumption behind the study
entails that a bank may fail due to insolvency and there are factors with both
systematic and idiosyncratic contents to influence the condition. The study further
focuses on discovering significance of those contributing factors to the solvency of
commercial banks of Bangladesh so that the model can be better utilized. The study
used data of selected Bangladeshi commercial banks listed in Dhaka Stock Exchange
and some macroeconomic data during the period of 2004-11.The data were analyzed
using panel data regression method under both fixed effect and random effect
frameworks. The study further conducts Hausman test, Wooldridge test, and
Heterokedasticity test to validate the regressions models. The paper utilizes an
insolvency ratio as a proxy of the solvency condition of the banks. The results show
that the market valuation component, the ratio of income from securities to effective
capital and the interaction term between Texas ratio and unemployment rate have
significant impact on the insolvency ratio. Although serious liquidity problems
theoretically can cause an otherwise solvent bank to fail under certain conditions,
however, the findings of the study indicate that liquidity does not significantly affect
the solvency condition of Bangladeshi commercial banks.
