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Bank capital regulation: How do Asian banks respond?

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  • Nguyen, Quang Thi Thieu
  • Gan, Christopher
  • Li, Zhaohua

Abstract

Capital regulation is a primary focus of regulators to maintain the stability and credibility of the financial system. However, whether banks increase capital and reduce the risk to respond to the capital regulation is uncertain. Examining this issue on Asian banks during the period between 2002 and 2016, this study finds that capital regulation has a negative effect on bank capital and no influence on bank risk. Stricter capital regulation even increases the bank's probability of default. This is because the capital regulation reduces banks' per-period future profits and thus, harms their franchise value. This effect is also a result of the relative high capital ratios of Asian banks compared to the minimum requirements. We also find that market characteristics and the bank capital regulatory environment are less relevant to bank capital and risk behaviours. In addition, strengthening the regulation during the crisis period increases bank risk while inducing banks to focus more on improving the equity ratio and the asset quality during the Basel III revision period.

Suggested Citation

  • Nguyen, Quang Thi Thieu & Gan, Christopher & Li, Zhaohua, 2019. "Bank capital regulation: How do Asian banks respond?," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x19301647
    DOI: 10.1016/j.pacfin.2019.101196
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    Cited by:

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    3. Roshanthi Dias, 2021. "Capital regulation and bank risk‐taking – new global evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 847-884, March.
    4. Gupta, Juhi & Kashiramka, Smita, 2020. "Financial stability of banks in India: Does liquidity creation matter?," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Asia; Capital regulation; Bank behaviours; Risk-taking; Simultaneous equations model;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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