Al washdeh, Nusiebeh Naha Falah; No een, Uma a; Danish, Muhammad Hassan;
Ahmed, Rizwan
A icle
Bank capi al and isk in eme ging banking o Jo dan: a
simul aneous app oach
Cogen Economics & Finance
P o ided in Coope a ion wi h:
Taylo & F ancis G oup
Sugges ed Ci a ion: Al washdeh, Nusiebeh Naha Falah; No een, Uma a; Danish, Muhammad
Hassan; Ahmed, Rizwan (2024) : Bank capi al and isk in eme ging banking o Jo dan: a
simul aneous app oach, Cogen Economics & Finance, ISSN 2332-2039, Taylo & F ancis, Abingdon,
Vol. 12, Iss. 1, pp. 1-17,
h ps://doi.o g/10.1080/23322039.2024.2322889
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Bank capi al and isk in eme ging banking o
Jo dan: a simul aneous app oach
Nusiebeh Naha Falah Al washdeh, Uma a No een, Muhammad Hassan
Danish & Rizwan Ahmed
To ci e his a icle: Nusiebeh Naha Falah Al washdeh, Uma a No een, Muhammad
Hassan Danish & Rizwan Ahmed (2024) Bank capi al and isk in eme ging banking o
Jo dan: a simul aneous app oach, Cogen Economics & Finance, 12:1, 2322889, DOI:
10.1080/23322039.2024.2322889
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© 2024 The Au ho (s). Published by In o ma
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FINANCIAL ECONOMICS | RESEARCH ARTICLE
Bank capi al and isk in eme ging banking o Jo dan: a simul aneous
app oach
Nusiebeh Naha Falah Al washdeh
a,b
, Uma a No een
c
, Muhammad Hassan Danish
d,e
and
Rizwan Ahmed
,g
a
School o Managemen , Ca di Me opoli an Uni e si y, UK;
b
Ca di School o Managemen Ca di Me opoli an
Uni e si y, Ca di , UK;
c
P ince Sul an Uni e si y, KSA;
d
School o Comme ce and Accoun ancy-Uni e si y o Managemen
and Technology, Laho e, Pakis an;
e
Resea ch Fellow a Depa men o Economics, Uni e si y o Religions and
Denomina ions, Qom, I an;
Bi mingham Business School, Uni e si y o Bi mingham, UK;
g
Bi mingham Ci y Business
School, Bi mingham, UK
ABSTRACT
Financial isk has ecei ed inc easing a en ion om policymake s and inancial ins i u-
ions. The e o e, he p esen s udy examines he ela ionship be ween capi al and isk
o Jo danian banks by using da a om 2010–2019. The s udy employs ixed e ec ,
andom e ec , GMM, and 3SLS. Ou indings show ha he capi al equi emen egu-
la ion has a posi i e impac on capi al and isk a es. Mo eo e , he s udy also con-
cludes ha Jo danian banks hold mo e han he minimum egula o y capi al
equi emen s laid down by Basel II, III, and he CBJ. The banking sec o inc eases i s
capi al adequacy by aising i s liquidi y and educing i s endency o ake isks. Ou
esul s indica e a highly signi ican nega i e ela ionship be ween Jo danian comme -
cial bank capi al and isk. Liquidi y isk, ROA and s ock ma ke capi aliza ion a e posi-
i ely ela ed o bank capi al. The esul s o he s udy sugges ha Jo danian banks
should be in ol ed in highe - isk lending ac ions and help inc ease compe i ion in he
banking sec o .
IMPACT STATEMENT
The banking sec o plays a i al ole in economic g ow h and bank capi al se es as a
bu e a he ime o economic shock. Simila ly, isk managemen is also c ucial o
he sus ainable inancial sec o and economic de elopmen . Thus, his s udy employs
a simul aneous app oach in de eloping a ela ionship be ween bank capi al and isk
in he Jo danian banking sec o . Ou indings show ha he capi al equi emen egu-
la ion has a posi i e impac on capi al and isk a es. Ou esul s also indica e a highly
signi ican nega i e ela ionship be ween Jo danian comme cial bank capi al and isk.
S udying he associa ion be ween capi al and isk o e s insigh s in o how banks man-
age and educe di e en isks, helping o de elop e icien isk managemen s a -
egies. A e s udying his ela ionship banks can also op imize hei capi al alloca ion
s a egies and can shed a ligh on how capi al can a ec he lending powe and
c edi a ailabili y o boos he inance in indus ies and hus con ibu e o economic
g ow h.
ARTICLE HISTORY
Recei ed 19 Janua y 2023
Re ised 15 Feb ua y 2024
Accep ed 20 Feb ua y 2024
KEYWORDS
Capi al equi emen s; isk-
aking beha iou ; capi al
egula ions; Jo dan
REVIEWING EDITOR
Da id McMillan, Uni e si y
o S i ling, S i ling, UK
SUBJECTS
Economics; Finance;
Business, Managemen and
Accoun ing
JEL CLASSIFICATION
G21; G32; G33
1. In oduc ion
Financial isk has ecei ed inc easing a en ion om policymake s and inancial ins i u ions, as la ge
losses ha e esul ed in many la ge banks ailing, pa icula ly in he las global inancial c isis, which may
equi e e ec i e isk managemen in he banking sec o . These ends ha e had ad e se e ec s in he
banking sec o se ices, p omp ing bank egula o y o ake a ious s eps o con ol he ma ke . The
ecen inancial c isis highligh ed he need o he inancial sys em’s s abili y, pa icula ly in ela ion o
CONTACT Muhammad Hassan Danish [email p o ec ed] School o Comme ce and Accoun ancy-Uni e si y o Managemen
and Technology, C-II Joha Town, Laho e, Pakis an
This a icle has been co ec ed wi h mino changes. These changes do no impac he academic con en o he a icle.
ß2024 The Au ho (s). Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/licenses/by/4.0/), which
pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed. The e ms on which his a icle has been
published allow he pos ing o he Accep ed Manusc ip in a eposi o y by he au ho (s) o wi h hei consen .
COGENT ECONOMICS & FINANCE
2024, VOL. 12, NO. 1, 2322889
h ps://doi.o g/10.1080/23322039.2024.2322889
bank isk and capi al con ol as an ex e nal sou ce. In he banking sec o , unde s anding he connec ion
be ween capi al and isk decisions is e y ele an . The e o e, he adjus men and co ec ing egula ions
in he banking a ea, he in es iga ion o he unde lying mechanisms should ecei e a big a en ion. In
his pape , we will explo e he mos impo an sou ces o isks in he Jo danian banking sec o . The
adjus men and co ec ion o banking egula ions should he e o e ocus g ea a en ion on esea ch
in o he unde lying mechanisms.
Du ing he s udy pe iod, he capi al adequacy a io (CAR) and sha e o he co e capi al o ie one is
e y close in Jo danian banking sys em, indica es he highes quali y capi al componen and he mos
capable o abso bing inancial isk and losses. Mo eo e , he s ock o sha eholde s in licensed banking
companies g ew 3.6% in 2015. These esul s show he sus ainabili y o he banking sys em ’s sol ency.
The capi al sha e o immig an s in he o al capi al o licensed banks in he Jo danian banking sys em
was app oxima ely 49% a he end o 2015. Legal ese e equi emen s by CBJ we e o iginally 12%
be o e going down o he ou s anding a e o 7%, as pa o he expansiona y measu es adop ed o
encoun e he global inancial c isis since 2009.
In conclusion, we can say ha he Jo danian banking sys em did no ace any p oblems in imple-
men ing he minimum capi al equi emen , Jo danian Banking sec o easily sa is y he Basel capi al
s anda ds and he CBJ capi al s anda ds which is highe han he Basel s anda ds. The inc ease in he
Jo danian banking sys em capi al o e ime has imp o ed he c edi acili ies o e ed o he indi idual,
p i a e and public in es men . On he o he hand, we can conclude ha how he Jo danian banks ook
ad an ages om i s high CAR o wi hs and he uns able poli ical en i onmen and isk. The high le el o
CAR has an impac on he dec ease o non-pe o ming loans because o he le e age a io inc eased o
12.7 pe cen , which was he minimum le el se by he CBJ 6%. As a esul o hei app op ia ely high
CARs, which a e he highes in he egion, he Jo danian banking sys em is no likely o su e any p ob-
lems o di icul ies in implemen ing Basel III capi al equi emen s.
P e ious s udies elabo a e ha egula ion signi ican ly a ec he decisions ega ding isk and capi al.
Bank ailu es led he Basel Commi ee o Banking Supe ision (SCBS) in 1989 o announce in he wake
o he ecen subp ime bubble c isis ha isk-based capi al c i e ia a e implemen ed o au ho ize he
banks’asse po olio capi al equi emen s (minimum 8%) o mee isks. In o de o enhance capi al
quan i y and quali y in he bank sec o , he BCBS p oposed a new egula o y o capi al amewo k.
The au ho i ies implemen he Capi al Regula ion o gua an ee ha he chance o de aul is kep o a
low in o de o limi bank isk wi h espec o he s abili y o he inancial sys em. Kahane (1977) claimed
ha by se ing a minimum capi al equi emen o banks, new capi al laws will educe bank isk and
ensu e he s abili y o he banking sys em. The capi al egula ions en o ced by he au ho i ies could
lead o dis o ions in banking beha io (Blum, 1999). The banks mus adjus hei isk and capi al o he
op imal amoun o le e age, which means ha banks will also aise he isk i i aises i s liquidi y o
mee he new capi al equi emen s (Koehn & San ome o, 1980). Regula o s can p ecise his by in oduc-
ing measu es o es ic he isk o banks and inc ease hei supe iso y and supe ised banking sys ems
(Kahane, 1977; Kim & San ome o, 1988; Genno e & Pyle, 1991). Changes in egula ion posi i ely a ec
bo h capi al and isk decisions (Sh ie es & Dahl, 1992; Jacques & Nig o, 1997); while ew s udies epo ed
he nega i e impac o he change in he egula ion on bank capi al a io (S olz, e al., 2003; Skully
e al., 2009). Whe eas ew epo ed a posi i e and insigni ican e ec o egula ion on bank capi al (Van
Roy, 2005).
Ano he ac o ha is likely o ha e a nega i e impac on isk is bank size, as la ge banks ha e lowe
isk exposu e due o hei inc eased di e si ica ion (Lindquis , 2004; Van Roy, 2005). Nume ous s udies
on he ac o s in luencing he capi al a io ha e disco e ed a nega i e ela ionship be ween size and
capi al a io ( o example, see Jacques & Nig o, 1997; Das & Ghosh, 2004; Van Roy, 2008; Be ge e al,
2008; Floque & Biekpe 2008; Skully e al., 2009). While o he s ound a posi i e impac o bank size on
capi al (G opp & Heide , 2010). The capi al a io is also hough o be signi ican ly in luenced by liquidi y,
hough some s udies ha e ound ha he e is no ela ionship be ween he wo a iables (Jokipii &
Milne, 2011; A hanasoglou). The e a e ewe s udies ha suppo he idea ha banks keep liquidi y on
hand o ac as a shock abso be , which would elimina e he need o addi ional capi al (Jokipii & Milne,
2011). Ea nings a e ano he elemen ha in luences a bank’s capi al a io, wi h high p o i abili y causing
2 N.N.F. ALRWASHDEH ET AL.
banks o inc ease hei capi al a io. Banks’less e icien decisions lead o highe isk exposu e since e i-
ciency le els impac bo h capi al and isk decisions.
I is e y essen ial o explo e he capi al- isk ela ionship as well as how he egula ion in luences he
isk and capi al changes in he banking sys em. I is e y essen ial o s udy he de elopmen o he
banking sec o s, whe e banks a e he main sou ce o unding. This s udy has a po en ial implica ion o
banking de elopmen , inancial s abili y and de elopmen o eme ging economies. S udying he associ-
a ion be ween capi al and isk in hese si ua ions o e s insigh s in o how banks manage and educe
di e en isks, helping o de elop e icien isk managemen s a egies. A e s udying his ela ionship
banks can also op imize hei capi al alloca ion s a egies, and can shed a ligh on how capi al can a ec
he lending powe and c edi a ailabili y o boos he inance in indus ies and hus con ibu e in
economic g ow h.
Pas s udies show he he e ogeneous link be ween isk and bank capi al. Some o hem ound a
nega i e ela ionship and some ound he posi i e ela ionship. S a ing wi h he in e se ela ionship,
he explana ion ocuses on deposi insu ance as a dominan bank beha iou , esul ing in lowe capi al
and highe le els o isk (Black e al., 1978; Ka eken & Wallace, 1978; Me on, 1972). While egula o y
p essu e can explain he posi i e link be ween bank capi al and isk, whe e he egula ion encou ages
banks, he capi al o which has inc eased o main ain mo e isky in es men s and a highe le el o isk
inc eases he capi al le el o a bank (Buse e al, 1981). In his a icle, we will explo e he mos signi ican
ac o s o isk in he banking sec o o Jo dan. P esen s udy leads o a new p oblem ocused on he
ela ionship be ween bank isk and capi al using mixed me hods. In addi ion, his s udy shows he
impac o new capi al equi emen s egula ions on he bank isk. Fo his pu pose, simul aneous
equa ion models a e used o examine he ela ionship be ween bank capi al and isk in ensi ely and
dis inc i ely, using FE, RE, GMM, and 3SLS.
The e o e, he cu en s udy o e s an empi ical analysis in o how isk and capi al a e a ec ed by
banking sec o egula ion. The emainde o he s udy is o ganized as ollows: A b ie o e iew o he
li e a u e is p esen ed in pa 2, a b ie his o y o Jo dan’s banking indus y is gi en in sec ion 3, and
da a, a iables, and me hodology a e discussed in sec ion 4.Sec ion 5 o he epo discusses he
empi ical indings. Sec ion 6 p o ides a summa y o he indings.
2. Li e a u e e iew
Soundness is a key ac o in he banking sys em’s success, especially he capi al egula ion ha aims o
con ol he di e en isks ha bank aces. Capi al a io is one o he majo decisions he bank is ocusing
on o ensu e banking sec o s abili y. Capi al and isk a e one o he cen al opics in he li e a u e on
banking and esea ch, ollowing he mos ecen inancial c isis. This sec ion concen a es on he majo
li e a u e wo ks, which in es iga ed he ole o egula ion on capi al and isk de e mina ions o banks.
Many empi ical s udies ha e s udied he ac ions o he banks o p o e he impac o egula ion on isk
and capi al. The sound impac s o capi al equi emen s in li e a u e ha e been ho oughly delibe a e
and heo ies claim ha unwa an ed capi al equi emen s can lead o excessi ely high- isk managemen
(see Kahane, 1977; Koehn & San ome o, 1980; Kim & San ome o, 1988).
Banks seem o change hei capi al a ios h ough capi al aising and lessening he isk, as egula o y
p essu e inc eases (Jacques & Nig o, 1997; Sh ie es & Dahl, 1992). While, some s udies con as o his
e idence (S olz e al., 2003; Van Roy, 2005). Inc eased capi aliza ion imp o ed he a e age e u n on
asse s (T ujillo-Ponce, 2013), while in con as , Godda d e al. (2004) ound he nega i e ela ionship
be ween bank capi al and e u n on asse s o he Eu opean banking sys em.
Acco ding o se e al ea lie esea ch, bank capi al and isk changes equen ly ha e a sizable impac
on he banks’ex-an e capi al le el (Iwa subo, 2007; Dis inguin e al., 2013). Nume ous ea lie esea ch
e ealed ha banks wi h low capi al le els end o inc ease hei isk when capi al a ios decline, he eby
inc easing he likelihood o de aul . Rime (2001) has iden i ied ha Swiss banks ha e a posi i e and sig-
ni ican impac on he isk- aking o banks in line wi h he minimum egula o y capi al equi emen and
he egula o y p essu e. S olz e al. (2003) shows ha banks wi h low capi al a io y a he same ime
o aise capi al and educe isk o coo dina e capi al and isk. In addi ion, Konishi and Yasuda (2004)
COGENT ECONOMICS & FINANCE 3
om he Japanese banks ound ha adding a c i e ion o capi al adequacy esul s in lowe ing isk-
aking.
Hom€
olle (2004) ound ha ce ain banks ha e inc eased isk o asse s due o he in oduc ion o
s ic capi al equi emen s. Hussain and Hassan (2005) de e mined ha capi al egula ion did no
imp o e he sha e a ios bu did minimize po olio isks o banks in de eloped coun ies. Jokipii and
Milne (2008) ound a posi i e associa ion be ween capi al adequacy and isk, wi h bank capi aliza ion
a ec ing capi al adjus men and isk. Alkadamani (2015) ound ha egula o y p essu e posi i ely
impac s bank capi al du ing he inancial c isis. Risk-based banking in es men equi emen s’implica-
ions on weal h we e examined by Eyssell and A shadi (1990). Acco ding o hei esea ch, ading banks’
capi al dec eased as a esul o he new isk-based capi al’s c ea ion. Due o low capi al a ios, banks
ha e also expe ienced he g ea es income losses.
Sh ie es and Dahl (1992) examined how capi al and isk a e ela ed in a sizable sample o he U.S.
banking sec o spanning he yea s 1983 and 1987. They no iced ha he disclosu e o isk and he
amoun o capi al a e bo h in e - ela ed. In addi ion, Blum (1999) explo ed he posi i e associa ion
be ween capi al and isk wi hin banks, sugges s ha isk- aking ac i i y is o en limi ed no solely due o
egula o y con ol bu by bank owne s o manage s. Ediz e al. (1998) looked a he impac o isk-based
capi al egula ions using qua e ly da a om he UK om 1989 o 1995. The s udy’s indings sugges ed
ha main aining capi al is a use ul echnique o enhancing bank s abili y wi hou in luencing banks’
lending decisions. The indings demons a e ha he UK capi al equi emen s appea o be a desi able
egula o y ins umen since hey imp o e he s abili y o he banking sys em wi hou in luencing banks’
lending decisions.
Pa k (1999) examined he e ec s o he asymme ic in o ma ion and capi al adequacy on po olio
decisions by use o OLS and 2SLS in US. The empi ical indings sugges ha asymme ical in o ma ion
in luences bank decisions. Simila ly, Be ge (1995) explains ha capi al equi emen s based on isk had a
mino e ec on g ow h o c edi . He also ound ha banks wi h low capi al end o educe loans. Rime
(2001) ound a posi i e associa ion be ween isk changes and capi al a ios in 154 banks, wi h egula o y
p essu e posi i ely a ec ing he RWA capi al a io bu no signi ican ly a ec ing bank isk. They also
explo ed ha change in capi al is nega i ely ela ed wi h capi al o RWA and capi al o o al asse s bu
posi i ely ela ed wi h isk.
F ancis and Osbo ne (2010) examined banks’ isk-based capi al a io decisions and he impac o egu-
la o y capi al equi emen s on capi al a ios. They ound ha egula ions a ec capi al managemen
p ac ices and capi al a ios luc ua e h oughou he economic cycle. Empi ical s udies in he U.S. bank-
ing sec o ha e ound ha bo h capi al and isk-based capi al a ios a e signi ican p edic o s o s ock
e u n ola ili y and bank Z-sco es. The capi al a io is ound o be be e han he isk-based capi al
a io, as i p edic s s ock- e u n ola ili y and bank Z-sco es, aligning wi h p e ious esea ch (Hogan,
2015).
A s udy was conduc ed on he obacco indus y in Pakis an o ind ou how inancing decisions a ec
co po a e liquidi y and g ow h in obacco indus y. I was ound ha obacco indus y makes use o
deb inancing and making use o his le e age o enjoy high p o i s (Salman, 2019). Salman and Muni
(2012) conduc ed a s udy on he cemen indus y in Pakis an o in es iga ing deb and equi y inancing
impac on business pe o mance. I was ound ha equi y inancing has posi i e impac on business pe -
o mance. Ano he s udy was conduc ed on pha maceu ical indus y o Pakis an o analyse pe o mance
by using inancial analysis. I was e ealed ha pe o mance was imp o ed o e a pe iod o ime as his
is conside ed as one o he indica o o he s akeholde s (Salman & Qama , 2011). The e is also li e a u e
a ailable on g een inance and g een beha iou and how i impac s he pe o mance. A s udy was con-
duc ed on Fashion indus y o Malaysia and i was e ealed ha consume s’g een beha iou impac s
he co po a e pe o mance. This s udy helps o unde s and he in luence o consume ’s beha iou on
co po a e pe o mance (Ali e al., 2020).
Abbas e al. (2019) s udied he ela ionship be ween bank capi al bu e on isk in US and s udy
e ealed ha he capi al bu e has a ying and nega i e e ec s on o al isk du ing he c isis, p e-c isis,
and pos -c isis. Da Fonseca Nicolay e al. (2018) ound ha du ing economic booms, banks educe cap-
i al bu e s and inc ease isk exposu e. On he con a y, Mahdi and Abbes (2018) de e mine a posi i e
bidi ec ional link be ween Islamic banks’capi al and isk. Thei indings indica e he isky na u e o his
4 N.N.F. ALRWASHDEH ET AL.
bank ca ego y, which is mos ly due o he Sha ia-complian con ac s used, such as Moudha aba and
Moucha aka con ac s. Fu he mo e, a s udy by Moudud-Ul-Huq (2019) ound ha highe capi al bu e s
and e iciency p omo e each o he , lowe ing he likelihood o bank ailu e (due o non-pe o ming
loans), e en hough inc eased isk hal s e iciency. As a esul , banks’g ea e s abili y inc eases capi al
bu e s. While ewe s udies ound no signi ican impac o bank capi al on isk (e.g., Bi a e al., 2018).
The ela ionship be ween isk and capi al a io is also widely discussed in us. P e ious indings show
ha capi al a io is posi i ely ela ed o isk while liquidi y is nega i ely ela ed o banks isk in US
comme cial banks (Abbas e al., 2021; Abbas & Ali, 2022). In ano he s udy on US comme cial banks
Abbas and Ali (2020) ound ha isk-based capi al is nega i ely ela ed o banks isk while non- isk cap-
i al is posi i ely ela ed o bank isk.
P e ious s udies ha e ei he examined he ela ionship o bank capi al on isk and pe o mance, cap-
i al equi emen s on bank isk, o impac o isk on bank capi al and pe o mance ela ed measu es. Bu
his s udy has con ibu ed in he p e ious knowledge by adding a simul aneous ela ionship be ween
bank capi al and isk, especially in he Jo dan. Based on he li e a u e men ioned abo e. The ollowing
al e na e hypo heses ha e been sugges ed o Jo danian banks.
H1: The e is a posi i e and signi ican impac o capi al on bank isk aking.
H2: The e is a nega i e and signi ican impac o isk aking on bank capi al.
3. Capi al and isk in he Jo danian banking sec o
Despi e o inc easing isk in global inancial sec o and issues in he Middle Eas egion, such as he pol-
i ical and economic issues ha impac ed he Jo danian economy, Jo dan has con inued o pe o m sa is-
ac o ily. Jo dan’s eal GDP achie ed mode a e g ow h o 2.4% in 2015 (WDI). Du ing he global inancial
c isis, ce ain banks a ound he wo ld lacked he capi al and liquidi y hey needed o ace isks. CAR
p o ed o be a aluable ins umen o inc ease he capaci y o banks o wi hs and inancial shocks and
high isks. The Basel Commi ee o Banking Supe ision made a numbe o changes conce ning Basel II
a he end o 2010 wi h he pu pose o s eng hening he capi al base o banks in quali a i e and quan-
i a i e e ms, aising liquidi y a es, and inc easing hei isk- aking capaci y (Basel III).
As a as Jo danian banking is conce ned, he sec o is gene ally s able. In addi ion o he con enien
le els o liquidi y, he Jo danian banking sys em has he highes and mos sa is ac o y capi al le els in
he Middle Eas and No h A ica (MENA) egion, which allows i o cope wi h shocks and g ea isks. A
he end o 2015, Jo dan’s inancial sec o comp ised licensed banks wi h o al asse s equal o JD48.0 bil-
lion (USD 67.6 billion). The asse s o licensed banks made up 94.1% o he o al asse s. The asse s o
licensed Jo danian banks eached JD 45.2 billion (USD 63.6 billion)
1
, ep esen ing 169.7% o GDP in he
las o 2015.
Jo dan’s banking sys em s a s implemen ing Basel II capi al adequacy s anda ds in 2008. The
Jo danian banking sys em mee s CBJ and Basel 2 equi emen s, wi h a d a ins uc ion o implemen ing
Basle III capi al equi emen s. The capi al adequacy a io and Tie 1 co e capi al sha e a e simila , wi h
he Tie 1 capi al a io accoun ing o 97.17% o he CAR. This high-quali y capi al componen is capable
o handling inancial isk and shocks, ensu ing banks’sa e y and du abili y. The capi al adequacy a io
o Jo danian banks was abo e he Basel equi y a io o 8%. Tha shows ha banks ha e a s ong cap-
abili y, i s ly, o abso b any loans o shocks ha could a ise by in e nal o ex e nal ac o s ha canno
be con olled.
The banking sys em in Jo dan, howe e , had su icien capi al o coun e any inancial c isis conse-
quences. Yea a e yea , he e has been a subs an ial inc ease in he isk o lending o his sec o in he
a io be ween indi iduals’deb o hei income and ne weal h, equi ing banks o conside he isk o
lending and expand hei s udy o add ess his isk e olu ion. Mo e han 35,6% o he o al acili ies p o-
ided by banks accoun ed o eal es a e acili ies. The eal s a e gua an ees co e 151% o he olume
o p ope y, which imp o es banks’capaci y o deal wi h isks.
The banking and inancial sec o s is gene ally s able in Jo dan. In he Middle Eas and No h A ica,
Jo dan boas s a s ong banking sys em ha can wi hs and high shocks and isks, as well as con enien
COGENT ECONOMICS & FINANCE 5
liquidi y and p o i abili y le els. The ollowing signs indica e ha he Jo danian banking sys em is esili-
en and secu e and can wi hs and shocks and high isks:
The high capi al adequacy a io in he MENA egion (a e he UAE). CAR in he Jo danian banking
indus y anged om 15.9% o 19.1% in yea s 2003–2015 (CBJ Repo s).
As a as he liquidi y a io is conce ned, Jo dan’s banking sys em enjoys a s able liquidi y ole as
highly liquid ese es accoun ed o a ound 151.3% a he end o 2015 compa ed o 179.6% in 2003,
which is mo e han he minimum a io se by he CBJ o 100% and ep esen ing ela i e s abili y in
he amoun o bank liquidi y.
In 2015, he ROA o he banking sec o in Jo dan was 1.1% compa ed o 0.7% in 2003. The e u n
on equi y (ROE) amoun ed o app oxima ely 10.3% by he end o 2015, compa ed o 9.9% in 2003.
The inancial sec o has achie ed a high deg ee o p o i abili y. Jo dan’s banking sys em’s a e o
e u n on asse s was 1.3 pe cen in 2015, compa a i ely low om 1.4% in 2014 and he e u n on
equi y was 10.3% in 2015 as compa ed o 11% in 2014. The low a io is pa ly a ibu ed o he ise
in bank income ax a es, in addi ion o he isk-a e se app oach ollowed by Jo dan’s banking sec o
(CBJ Repo s).
Finally, he Jo danian banking sys em has shown a s ong sol ency a io, which inc eased om 7.5%
in 2003 o 12.70% in 2015 ( he Basel minimum le e age a io was 3%).
4. Da a
The a icle aims o analyse he wo models below, showing he associa ion be ween capi al and isk in
Jo dan’s comme cial banks be ween 2010 and 2019 and shed ligh on how he Jo danian comme cial
banks eac o he egula ion on hei capi al. The da a we e collec ed om he Amman S ock Exchange,
Associa ion o Banks in Jo dan, he Cen al Bank o Jo dan, and he comme cial Jo danian bank’s annual
epo s.
4.1. Va iable desc ip ion
In his s udy, p o i abili y measu es and bank-speci ic a iables a e conside ed as key a iables. This a -
icle examines he impac o egula o y p essu e on Jo dan’s banks’capi al and isk. To es his ela ion-
ship, he da a om 11 comme cial banks o Jo dan we e collec ed o e he pe iod o 2010–2019. Ele en
banks (all local comme cial banks in Jo dan) a e al eady lis ed in he Amman S ock Exchange (ASE).
Hence, he pe o mance o hese banks is highly impo an o sha eholde s. Due o he a ailabili y o all
in o ma ion o all banks, balanced panel da a is used o analysis. In o al, he sample con ains 110
obse a ions. Bank-speci ic in o ma ion (mic o-in o ma ion), indus y-speci ic a iables a e mainly ga h-
e ed and collec ed om banks’annual epo s published in Bloombe g, ASE, CBJ, and Jo dan Bank
Associa ion (ABJ). Uns uc u ed in e iews wi h CBJ isk manage s and a ious comme cial banks we e
also conduc ed. The pu pose o hese in e iews was o p o ide he Jo danian banking sys em wi h a
b oad unde s anding o he isk-based capi al equi emen s. The budge shee s, income s a emen , and
no es we e examined o ob ain da a on he a iables men ioned in he model. Fo selec ed a iables, all
alues aken a e in JD. Ele en banks ep esen ing he majo i y o he asse s in he Jo danian banking
sys em we e chosen based on he da a ha we e a ailable. The lis o he a iables used a e p esen ed
in (Table 1). The s udy uses STATA so wa e o analysing he da a and p oducing he eg ession esul s.
4.2. Me hodology
We u ilized he simul aneous equa ion model es ablished by Jacques and Nig o (1997) and Rime (2001)
o e alua e he link be ween capi al and isk. By adding he p ocess o adjus men o bank capi al, he
model is upda ed in line wi h capi al egula ion, and isk le els a e spli in o wo a iables (endogenous
and exogenous). The model is w i en as below:
DCARi ¼DdCARi þXi, (1)
6 N.N.F. ALRWASHDEH ET AL.
DRISRi ¼DdRISKi þZi, (2)
whe e DCAR
i
and DRISK
i
a e he obse ed a ia ions in capi al and isk le els o bank ‘i’in pe iod ‘ ’,
espec i ely, while X
i
and Z
i
a e he exogenously de ined a iables. The DdCAR
i
and DdRISK
i
a e
endogenously de e mined a ia ions in capi al and isk ha a e de eloped using he amewo k o pa -
ial adjus men . The pa ial adjus men amewo k uses disc e iona y changes in capi al and isk
(DdCAP
i,
and DdRISK
i,
) o help banks aim o op imal capi al and isk le els. Banks adjus hei capi al
and isk o hei a ge s when exogenous shocks emo e eal a ge le els, obse ing only pa ial
changes o hei a ge le el. The disc e iona y capi al- isk changes a e p opo ional o he di e ence
be ween a ge and ‘ -1’le el.
DdCARi ¼a0CARi –CARi −1
ðÞ (3)
DdRISKi ¼b0RISKi –RISKi −1
ðÞ (4)
whe e, CAR
i
and RISK
i
deno e he banks’ a ge le el o capi al and isk. By subs i u ing equa ions ‘3’
and ‘4’in o equa ions ‘1’and ‘2’, he obse ed capi al and isk changes will be w i en as ollows:
DCARi ¼a0CARi –CARi −1
ðÞ
þXi, (5)
DRISKi ¼b0ðRISKi –RISKi −1ÞþZi, (6)
Eqs. (5) and (6) show ha obse ed changes in capi al and isk depend on he a ge le el o capi al
and isks along wi h he lagged alue o capi al and isk.
Addi ionally, Eqs. (7) and (8), which depend on desi ed capi al and isk le els, es ima e changes in
capi al and isk du ing he ime pe iod ‘ ’. Bank capi al and isk a e in luenced by exogenous and
Table 1. Va iables and measu emen .
Va iables No a ion Measu emen Type Sou ce
Dependen Va iables
Chang in Capi al DCAP Ra io o capi al o o al asse s (RCTA) and a io o capi al o
isk weigh ed asse s (RCWA) obse ed changes o bank j
h oughou ime pe iod . The same a ios we e
employed in ea lie esea ch (see, o ins ance, Agga wal
and Jacques, 2001; Ediz e al., 1998; and Rime, 2001).
Bank-speci ic ASE
Change in Risk DRISK Risk le els we e acked o bank j h oughou he cou se o
ime, and he isk-weigh ed o al asse s o o al asse s
a io was calcula ed. The p oxy has been used in p io
in es iga ions, such as hose by Jacques and Nig o
(1997), Agga wal and Jacques (1998), and Rime (2001).
Bank-speci ic ASE
Independen a iables
Bank size SIZE Size (SIZE) is measu ed by na u al log o he o al asse s i.e.
Ln o To al Asse s. In he li e a u e he Size a iable
examine by many s udies such as Jacques and Nig o
(1997); Agga wal and Jacques (1998); and Rime (2001);
G opp and Heide (2010); Das and Ghosh (2004);
Lindquis (2004); Van Roy (2005); and Floque and Biekpe
(2008).
Bank-speci ic ASE
Re u n on Asse s ROA Re u n on Asse s (ROA) is measu e h ough Ne income/
To al asse s. F om he li e a u e p oxy has been used
such as (Agga wal and Jacques 1998; and Rime, 2001;
Tanda, 2015; and Mahdi and Abbes, 2018)
Bank-speci ic ASE
Liquidi y LTD Liquidi y is measu e by To al Loans/ To al Deposi s. To
es ima e bank liquidi y, we use he a io o o al loans o
o al deposi s. Bo h capi al and isk equa ions con ain
he a io o o al loans o o al deposi s (LTD).
Bank-speci ic ASE
Loan loss p o ision LLP I is in oduced as an explana o y a iable in he isk
equa ion by Rime (2001); G opp and Heide (2010, pp.
587-622); Canna a and Quaglia iello (2006)
Bank-speci ic ASE
Regula o y P essu e REG I a bank’s capi al adequacy a io is below he egula o y
capi al minimum o 12%, hen REG ¼1. I a bank’s
capi al adequacy a io is equal o o g ea e han he
legal minimum o 12%, hen REG ¼0. We can ake he
examples om li e a u e such as (Awdeh, El-Moussawi,
and Mach ouh, 2011; and Zhang, Jun, and Liu, 2008, pp.
183-189)
Bank-speci ic ASE
S ock ma ke capi aliza ion
(LNSMC)
I is measu ed by mul iplying s ock ma ke p ice and
ou s anding sha es o he bank. Na u al log (ln) o SMC
is used in his s udy.
Bank-speci ic ASE
Sou ce: ASE, CBJ, Da a-S eam and Bloombe g.
COGENT ECONOMICS & FINANCE 7
and 3SLS by using new echniques h ough simul aneous equa ion models. We con ibu e o empi ical
li e a u e h ough he use o Jo danian banking da a o e he pe iod 2010–2019, du ing which a mo e
compe i i e en i onmen is de eloped, and bank e iciency is inc eased.
Empi ical e idence sugges s ha capi al egula ion equi emen has a posi i e and signi ican impac
on he capi al and le el o isk. Ou s udy also concludes ha Jo danian banks ha e mo e han he min-
imum egula o y capi al equi emen s se by Basel II, III and he CBJ and boos hei capi al adequacy by
g owing hei esou ces and educing hei isk- aking. The indings also show a highly signi ican and
nega i e ela ionship be ween capi al and isk o Jo danian comme cial banks. Mo eo e , he s udy also
inds he posi i e and signi ican ela ionship o liquidi y, ROA and s ock ma ke capi aliza ion wi h banks
capi al in Jo dan and nega i e in luence o bank size on capi al and isk.
The esul s demons a e ha , gi en he signi ican con ibu ion o he banking sys em o economic
g ow h and de elopmen , bank manage s mus selec an app op ia e egula o y en i onmen in o de
o inc ease he compe i i eness o he banking sec o and gi e g ea e conside a ion o impo an ac-
o s ha will enhance capi al equi emen s and lowe isks in he Jo danian banking sec o . In conclu-
sion, esea ch on bank capi al and isk has b oad implica ions o inancial s abili y, economic g ow h,
egula o y policy, and o e all inancial sys em s abili y. P omo ing bank s abili y and p ese ing he low
o c edi and economic ac i i y mus coexis in ha mony, acco ding o esea che s and policymake s.
In addi ion o he gains om ex ending p e ious wo k on he isk-capi al ela ionship, we i mly
belie e ha ou empi ical esul s may be use ul o making ele an policies o he Jo danian go e n-
men and he banking egula o y au ho i y. Jo danian banks in pa icula should be allowed o conduc
mo e isk-based lending and help o inc ease compe i ion in he banking sec o (dec ease concen a-
ion). Las ly, Jo dan’s banking sec o should be u he es ablished, and be e con ol o he s ock ma -
ke . We a e looking o adop ano he esea ch using di e en measu es o isk.
No e
1. h ps://www.cbj.go .jo/EchoBusV3.0/Sys emAsse s/1a927c6c-b2a8-42db-b6a3-b6640d4d150c.pd .
Disclosu e s a emen
No po en ial con lic o in e es was epo ed by he au ho (s).
Funding
The au ho s would like o hank P ince Sul an Uni e si y, Riyadh, Saudi A abia o hei suppo .
Abou he au ho s
D . Nusiebeh Naha Falah Al washdeh is cu en ly wo king as a senio Lec u e a Ca di
Me opoli an Uni e si y. She has done PhD in Economics and Finance om Uni e si y o
Po smou h. He in e es s a e. Financial Sec o , Banking Indus y pe o mance, Insu ance
Companies pe o mance. G een Financing. She is also holding p o essional quali ica ion in inance
om Cha e ed Ins i u e o Secu i ies and In es men (CISI-UK) and cu en ly Associa e Fellow
Membe o CISI (UK).
D . Uma a No een is wo king as an Assis an P o esso a Finance Depa men , P ince Sul an
Uni e si y Riyadh, Saudi A abia. She comple ed he PhD om Founda ion Uni e si y Islamabad,
Pakis an in 2010. He a ea o specializa ion is inance. She has an ex ensi e eaching expe ience o 24
yea s a unde g adua e, g adua e and pos g adua e le els. She has 26 e e eed and indexed Jou nal
publica ions, 15 con e ence p oceedings and a published book o he c edi . She is a p o essional
ISO ce i ied aine o he USAID p og am, wi h Asia Founda ion, Islamabad Pakis an. She has also
de eloped aining manual o non-p o i o ganiza ions unde The Asia Founda ion USAID p ojec a
CIIT. She has deli e ed i e ounds o ainings o execu i es and senio le el managemen o unde
14 N.N.F. ALRWASHDEH ET AL.
his p og am. She has deli e ed a aining p og am o he execu i es o Riyadh Bank, Saudi A abia and aining unde
Eli e Monsha’ PSU p og am o en ep eneu s held a P ince Sul an Uni e si y, Saudi A abia.
D . Muhammad Hassan Danish is an Assis an P o esso o Economics a Uni e si y o
Managemen and Technology, Laho e-Pakis an. His esea ch expe ise’s comp ises in he di e si ied
ield o social sciences wi h he mainly ocus on p ima y da a esea ch. His wo k includes econom-
ics o happiness, public policy analysis and om he ield o de elopmen on households and
indus ial economics. His expe ise is mic o and su ey da a analysis, public and social policy,
econome ic modelling, and mic oeconomic heo y. Mo eo e , D Hassan s eamlined he a ea o
esea ch wi h sus ainable de elopmen goals o UNDP. He explo es he cu en and mo e ele an
issues in he esea ch a ea o p o ide a way o wa d in achie ing SDGs. He has excellen command
o econome ic so wa e’s including S a a, SPSS, E iews and Sma PLS o da a analysis especially he p ima y o
su ey da a.
D Rizwan Ahmed is a Lec u e in Finance a Uni e si y o Bi mingham. Be o e joining Uni e si y o
Bi mingham, he gained wide- anging eaching and esea ch expe ience as a lec u e and semina
leade in Ca di Business School, Bi kbeck, Uni e si y o London, Uni e si y o Hudde s ield, and
he Uni e si y o Hull. His esea ch in e es s a e inancial economics, Banking Indus y pe o mance,
Insu ance Companies pe o mance. His expe ise includes panel da a analysis, and su ey da a ana-
lysis o co po a e and banking sec o .
ORCID
Muhammad Hassan Danish h p://o cid.o g/0000-0001-9031-3614
Da a a ailabili y s a emen
Da a used in his esea ch will be a ailable on eques . Reade s can eques o da a on ollowing email a e publi-
ca ion o pape .
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