The Mediating Effect of Capital Adequacy on the Relationship Between the ECL Model and Commercial Banks Profitability in the Middle East

ABSTRACT This study examines the mediating role of capital adequacy, in accordance with Basel III, in the relationship between the Expected Credit Loss (ECL) model under IFRS 9 and the profitability of commercial banks in the Middle East. Using panel data from 36 commercial banks across six countries over the period 2015–2020, mediation analysis is employed to assess how the transition from IAS 39 to IFRS 9 affects bank performance. The results indicate that capital adequacy partially mediates the relationship between ECL and profitability, while ECL has a significant positive impact on both return on assets and return on equity, highlighting the importance of maintaining adequate capital buffers and integrating forward‐looking information. The study provides practical insights for policymakers and regulators on aligning IFRS 9 with Basel III to enhance financial stability and risk management in the banking sector, and contributes to the academic literature by clarifying the interaction between regulatory frameworks and bank performance in emerging markets.