The Influence of Banks' Assets Quality on Capital Adequacy

The aim of this paper is to investigate the influence of assets quality on capital adequacy in European banks. Assets quality is measured with non-performing loans ratio (NPL ratio) and with coverage ratio of NPLs which are two independent variables in this research. The loan is considered non-performing when more than 90 days pass without the borrower paying the agreed instalments or interest. NPL ratio is calculated as portion of NPL in total loans. NPL coverage is portion of nonperforming loans covered with value adjustments. Analysed data included aggregated data for 19 European countries. As European Central Bank (ECB) reported, the distribution of NPL has been highly unequal among EU countries since the start of the crisis. Toward the end of 2016 the average rate of non-performing loans in EU is slowly decreasing but once again in unequal paces among countries, so authors wanted to investigate the impact of NPL ratio and its coverage on capital adequacy. Authors expect that both non-performing loans ratio and coverage ratio will have negative influence on capital adequacy. The thesis will be tested with statistical methods.