Panel data analysis of tier 2 capital and capital adequacy in Australia and Singapore

This paper examines the profitability implications of Tier 2 capital and changes in regulatory capital adequacy (ΔCAR) in Australia and Singapore. Australia's 2019 loss-absorbing capacity policy, which substantially increased Tier 2 issuance among major banks, provides a useful setting for examining the profitability implications of Tier 2 capital relative to Singapore, where no comparable increase occurred during the study period. The study employs a semi-annual panel of seven major listed banks that dominate the Australian and Singaporean banking sectors from 2010 to 2024 and applies a bias-corrected fixed-effects estimator. Results show that Tier 2 capital is negatively associated with Return on Assets (ROA), with significant effects for Australian banks only. Although ΔCAR is negatively associated with profitability in pooled estimates, its effects are weaker and generally insignificant in country-specific analyses. The study contributes by providing evidence the profitability implications of Tier 2 capital differ from those of overall capital adequacy.