Impact of Bank-Specific and Macro Economics Variables on Capital Adequacy Ratio (CAR) in the Private Banks of Pakistan

The main aim of this research is to investigate the determinants of capital adequacy ratio (CAR) in the private banks of Pakistan. The quantitative approach has been used to collect secondary data from the financial reports of the banks from the years 2011 to 2020. The panel OLS technique was used for conducting the hypotheses testing. Bank-specific variables included 1. Profitability (ROA), 2. Return on equity, 3. Bank size, 4. Financial leverage, 5. Liquidity ratio, 6. The leverage ratio is 7. Credit risk, 8. Deposit ratio, 9. Loan to deposit, 10. Loan loss provision, 11. Loan to assets ratio, 12. Nonperforming loan. Macroeconomic variables included 1. Economic growth, 2. Inflation, 3. Interest rate, and 4. Exchange rate. The results have shown that return on assets has a positive effect on the capital adequacy ratio, whereas, bank size, financial leverage, loan size, and credit risk have a negative effect. On the macroeconomic front, the exchange rate has a negative effect on the capital adequacy ratio. The capital adequacy ratio (CAR) is a measurement of a bank’s available capital expressed as a percentage of a bank’s risk-weighted credit exposures. It is used to protect depositors and promote the stability and efficiency of financial systems. Therefore, it is required that the policymakers should implement the policy of raising capital to meet the capital requirements