Investigating the Effect of Capital Adequacy on the Economic Efficiency Index of State Banks in Iran

Capital adequacy, as a necessary indicator for protecting the debt payment and profitability of banks, is regarded as one of the most important and fundamental indices in a financial institution. Economic efficiency is achieved when banks use the best combination of inputs and reach an optimal level of output and service delivery by reducing operating costs. In order to promote a healthy financial system, the legislator requires banks to have sufficient capital to deal with losses and limit credit risks. This study is based on the Fama hypothesis, which states that the regulation of banking improves the economic efficiency of banks, as well as seeks to answer the question of whether the improvement in the capital regulations of banks has an effect on their economic efficiency. To answer this question, the data of seven state banks and the panel data econometric method were used for the period of 2016 to 2021. The results of the model estimation show that the coefficients of bank size variables, profitability, NPL, and the ratio of total facilities to total deposits are negative and statistically significant at the 1% level, while the variable coefficient of capital adequacy is positive and significant at 10% level. This result indicates that the increase in regulatory rules regarding banks' capital affects the change of banks' strategy regarding their internal operations, which will ultimately lead to better bank performance or the improvement of the bank's economic efficiency index.