The trade-off relationship between bank stability and bank profitability under capital adequacy effect in Vietnam

Abstract

In the modern banking industry, the connection between banks' profitability and stability, especially under the influence of the capital adequacy ratio, plays a significant part in ensuring long-term and sustainable development. CAR is an essential tool for banks to maintain the minimum capital level required to cope with financial risks and protect the banking system from unexpected fluctuations. However, maintaining the CAR high may have an influence on the bank's capacity to yield a profit, as it limits the ability to expand credit and increases the cost of capital mobilization. This study applies quantitative analysis methods and uses panel data over a specified period to clarify the impact of CAR on the stability and performance of banks within the framework of Basel regulations, especially with the effect of the ownership structure. The results indicate that maintaining a high level of CAR helps to strengthen the stability of banks, emphasizing the importance of Basel regulations in mitigating risks. However, the relationship between CAR and profitability differs significantly depending on the structure of ownership and the level of compliance with Basel regulations. In particular, banks that apply the latest Basel regulations and have state-owned domination witness mixed effects on profit returns. These findings provide important insights for policymakers, regulators, and financial institutions in adjusting capital regulations appropriately, creating a balance between ensuring stability and optimizing profits, thereby promoting the sustainable development of the banking industry. The study also calls for a flexible approach to regulatory policy and encourages further research to clarify the factors affecting bank performance within the framework of Basel regulations