www.theinternationaljournal.org > RJEBS: Volume: 02, Number: 07, May-2013 Page 21 Secondary capital adequacy management model with overview of Basel III –Case on the banking sector in the Republic of Macedonia 1 Prof. Klimentina Poposka, PhD Institute of Economics-Skopje, University Ss Cyril and Methodius-Skopje, Prolet 1, 1000 Skopje, Republic of Macedonia Marko Trpkoski, PhD NLB Tutunska bank AD Skopje, Vodnjanska 1, 1000 Skopje, Republic of Macedonia ABSTRACT Capital adequacy represents a challenge for stability of the financial sector, particularly in the periods of crisis and recession. Events in recent years and the collapse of a number of banking institutions caused a global change in the risks perception. Hence, banks become more risk averse in their credit activities. The financial institutions in the Republic of Macedonia are not exception of the ongoing trend of increased risk The challenges for banks in achieving Basel III standards in different countries could vary dramatically. Key reasons for differences could be the level of development of financial markets and institutions, the differences in the share of on-balance and off-balance sheet activities, product differentiation and a number of other variables. This paper argues finding the key variables affecting the capital adequacy of banks in the Republic of Macedonia. Identification and quantification of the adequate variables enables recognition of weak and strong sides of the banks in the country, and thus the key challenges in the following years. The results of the econometric model indicated that the spread between interest rates on credits and deposits nominated in foreign currency (F.C), non-performing loans in the total (gross) amount of loans and the share of net-interest income in gross income, present the key independent variables, statistically important for the capital adequacy ratio of the banking sector in the Republic of Macedonia. Nevertheless, other independent variables such as rate of staff costs (which are the basis of non-interest expenses)/non-interest expenses, the spread between interest rates on credits and deposits in domestic currency (MKD), the share of loans to companies and households in total loans, the rates of share of the equity securities in banks own assets, the share of the non-interest costs in gross income, as well as, the rates of highly liquid assets in the total amount of assets, demonstrated no significant impact on the dependent variable. The applied model is an alternative model and an extra tool in the capital adequacy management for the banks. It could be used combined with existing models for capital adequacy management of the banking sector in the country on the level on each individual bank. Key words: capital adequacy, Basel standards, independent variables, statistical significance, Macedonian banks. JEL classification: G21 1. KEY LIMITS AND IMPLICATIONS OF THE BASEL III STANDARDS ACCOMPLISHMENT Enlarged risks in the banking sector initiated higher regulatory requirements for capital adequacy rate. Prior to analysis of the current situation in the banking sector in the Republic of Macedonia, identifying the key differences between the new Basel III standards and previous capital 1 The attitudes expressed in this research paper present the personal perception of the writers on the subject and in no case can be related to the official positions of the institutions where the authors work.