A Statistical Re-assessment of Capital Adequacy and Insolvency Risk in Commercial Banks of India

This paper is an attempt to empirically explore the association of capital adequacy and insolvency risk of the Indian Commercial Banks, while controlling for various other bank specific and macro-economic factors which also affects the risk level of the banks. To find the inter-relationship of Capital Adequacy Ratio (CAR) and insolvency risk, data of 21 years and 43 banks have been taken into consideration. Simultaneous Equations Model (SEM) is used to examine the association between Risk and Capital Adequacy Ratio and Two Stage Least Squares (2SLS) method is being used to estimate the parameters of the Simultaneous Equations Model. The findings reflect that both variables have inverse impact on each other. The other micro and macro-economic variables also have significant impact on risk and capital of the banks.