Abstract
This paper reports new findings on the determinants of bank capital ratios. The results are from an unbalanced panel data set spanning eight years around the period of the 1997–1998 Asian financial crisis. Test results suggest a strong positive link between regulatory capital and bank management’s risk-taking behaviour. The risk-based capital standards of the regulators did not have an influence on how regulatory capital is adjusted by low-capitalized banks, perhaps due to the well-documented banking fragility during the test period. Finally, bank capital decisions seem not to be driven by bank profitability, which finding is inconsistent with developed country literature that has for long stressed the importance of banks’ earnings as driving capital ratios. Although the study focuses only on one developing economy, these findings may help to identify the correlates of bank capital ratios in both developed and developing economies since this topic has received scant attention of researchers. These findings are somewhat consistent with how banks engaging in risky lending across the world could have brought on the 2007–2008 banking liquidity and capital erosion crisis.
Similar content being viewed by others
References
Angbazo L. (1997) Commercial bank net interest margins, default risk, interest-rate risk and off-balance sheet banking. Journal of Banking & Finance, 21: 55–87. doi:10.1016/S0378-4266(96)00025-8
Baltagi B.H. (1995) Econometric analysis of panel data. Wiley, Chichester
Bank Negara Malaysia. (1994–2003a). Monthly Statistically Bulletin. Kuala Lumpur, Malaysia: BNM.
Bank Negara Malaysia. (1994–2003b). Quarterly Economic Bulletin. Kuala Lumpur, Malaysia: BNM.
Bank Negara Malaysia. (1998–2003). Annual Report. Kuala Lumpur, Malaysia: BNM.
Bank Negara Malaysia. (1999). The central bank and financial system in Malaysia: A decade of change 1989–1999. Kuala Lumpur, Malaysia: BNM.
Berger A.N., Herring R.J. (1995) The role of capital in financial institutions. Journal of Banking & Finance 19: 393–430. doi:10.1016/0378-4266(95)00002-X
Berger A.N., Udell G.F. (1994) Did risk-based capital allocate bank credit and cause a “credit crunch” in the United States?. Journal of Money, Credit and Banking 26: 585–628. doi:10.2307/2077994
Borio, C., Furfine, C., & Lowe, P. (2001). Procyclicality of the financial system and financial stability: Issues and policy options. BIS Papers (No. 1).
Cebenoyan S., Cooperman E.S., Register C.A. (1999) Ownership structure, charter value and risk-taking behavior of thrifts. Financial Management 28: 43–60. doi:10.2307/3666116
Chuiri M.C., Ferri G., Majnoni G. (2002) The microeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the future. Journal of Banking & Finance 26: 881–904. doi:10.1016/S0378-4266(01)00267-9
De Bondt G.J., Prast H.M. (2000) Bank capital ratios in the 1990s: Cross-country evidence. BNL. The Quarterly Review 212: 72–97
Demsetz R.S., Strahan P.E. (1997) Diversification, size and risk at bank holding companies. Journal of Money, Credit and Banking 29: 300–313. doi:10.2307/2953695
Demstez R.S., Saidenberg M.R., Strahan P.E. (1996) Banks with something to lose: The disciplinary role of franchise value. Federal Reserve Bank of New York. Economic Policy Review 2: 1–14
Ediz T., Michael I., Perraudin W. (1998) The impact of capital adequacy standards on UK bank behaviour. Federal Reserve Bank of New York. Economic Policy Review 4: 15–22
Eisenbeis R.A., Kwast M.L. (1991) Are real estate depositories viables? Evidence from commercial banks. Journal of Financial Services Research 5: 5–24. doi:10.1007/BF00127081
Gennotte G., Pyle D. (1991) Capital controls and bank risk. Journal of Banking & Finance 15: 805–824. doi:10.1016/0378-4266(91)90101-Q
Ghoshi S., Nachane D.M., Sahoo S. (2003) Capital requirements and bank behaviour: An empirical analysis of Indian public sector banks. Journal of International Development 15: 145–156. doi:10.1002/jid.947
Greene W.H. (2000) Econometric analysis. Prentice Hall Inc, New Jersey
Hannan T.H., Hanweck G.A. (1988) Bank insolvency risk and the market for large certificates of deposit. Journal of Money, Credit and Banking 20: 203–211. doi:10.2307/1992111
Haubrich J., Wachtel P. (1993) Capital requirements and shifts in commercial bank portfolios. Federal Reserve Bank of Cleveland. Economic Review 29: 2–15
Horiuchi A., Shimizu K. (2001) Did Amakudari undermine the effectiveness of regulator monitoring in Japan?. Journal of Banking & Finance 25: 573–596. doi:10.1016/S0378-4266(00)00089-3
Hovakimian A., Kane E.J. (2000) Effectiveness of capital regulation at US commercial banks, 1985–1994. The Journal of Finance 55: 451–469. doi:10.1111/0022-1082.00212
Hovakimian A., Kane E.J., Laeven L. (2003) How country and safety-net characteristics affect bank risk-shifting?. Journal of Financial Services Research 23: 177–204. doi:10.1023/A:1024699811875
Hsiao C. (1986) Analysis of panel data. Cambridge University Press, Cambridge
Jacques K., Nigro P. (1997) Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach. Journal of Economics and Business 49: 533–547. doi:10.1016/S0148-6195(97)00038-6
Kahane Y. (1977) Capital adequacy and the regulation of financial intermediaries. Journal of Banking & Finance 1: 207–218. doi:10.1016/0378-4266(77)90007-3
Keeley M. (1990) Deposit insurance, risk and market power in banking. The American Economic Review 80: 1183–1200
Kennedy P. (1998) A guide to econometrics. The MIT Press, Cambridge
Kim D., Santomero A.M. (1988) Risk in banking and capital regulation. The Journal of Finance 43: 1235–1244. doi:10.2307/2328216
Koehn M., Santomero A.M. (1980) Regulation of bank capital and portfolio risk. The Journal of Finance 35: 1235–1244. doi:10.2307/2327096
Konishi M., Yasuda Y. (2004) Factors affecting bank risk taking: Evidence from Japan. Journal of Banking & Finance 28: 215–232. doi:10.1016/S0378-4266(02)00405-3
Kuala Lumpur Stock Exchange. (1996–1998). Annual Companies Handbook.
Nash R.C., Sinkey J.F. (1997) On competition, risk, and hidden assets in the market for bank credit cards. Journal of Banking & Finance 21: 89–112. doi:10.1016/S0378-4266(96)00030-1
Orgler Y.E., Taggart R.A. (1993) Implications of corporate capital structure theory for banking institutions: Note. Journal of Money, Credit and Banking 15: 212–221. doi:10.2307/1992401
Rime B. (2001) Capital requirements and bank behaviour: Empirical evidence for Switzerland. Journal of Banking & Finance 25: 789–805. doi:10.1016/S0378-4266(00)00105-9
Rochet J.C. (1992) Capital requirements and the behaviour of commercial banks. European Economic Review 36: 1137–1178. doi:10.1016/0014-2921(92)90051-W
Rojas-Suarez, L. (2001). Rating banks in emerging markets: What credit rating agencies should learn from financial indicator. Institute for International Economics Working Paper, WPO1-6 (May).
Saunders A., Strock E., Travlos N.G. (1990) Ownership structure, deregulation and bank risk-taking. The Journal of Finance 45: 643–654. doi:10.2307/2328676
Saunders A., Wilson B. (2001) An analysis of bank charter value and its risk-constraining incentives. Journal of Financial Services Research 19: 185–195. doi:10.1023/A:1011163522271
Shrieves R., Dahl D. (1992) The relationship between risk and capital in commercial banks. Journal of Banking & Finance 16: 439–457. doi:10.1016/0378-4266(92)90024-T
Sinkey J.F., Nash R.C. (1993) Assessing the riskiness and profitability of credit-card banks. Journal of Financial Services Research 2: 127–150. doi:10.1007/BF01046902
Song, I. (1998). Korean banks’ responses to the strengthening of capital adequacy requirements. Federal Reserve Bank of San Francisco Working Paper (PB98-01).
Weisbrod, S., Lee, H., & Rohas-Suarex, L. (1992). Bank risk and the declining franchise value of the banking system in the United States and Japan. IMF Working Paper.
Yu H.-C. (2000) Banks’ capital structure and the liquid asset—policy implication of Taiwan. Pacific Economic Review 5: 109–114. doi:10.1111/1468-0106.00093
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Ahmad, R., Ariff, M. & Skully, M.J. The Determinants of Bank Capital Ratios in a Developing Economy. Asia-Pac Financ Markets 15, 255–272 (2008). https://doi.org/10.1007/s10690-009-9081-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10690-009-9081-9