Factors Affecting the Solvency of Commercial Banks of Bangladesh: An Empirical Evidence

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.