The implication of banking regulation on bank business model: evidence from the ASEAN countries

Purpose - The purpose of this paper is to examine to what extent is the impact of Basel II adoption on bank business models in the emerging market of selected ASEAN member states. Design/methodology/approach - To evaluate the impact of the Basel II regulation on banking business models, a difference-in-differences estimation approach is used. This study defines bank business models using diversification index of a modified Herfindahl–Hirschman Index. Findings - The findings suggest that the Basel II framework only affects banks’ income diversification, while there is no evidence that it leads to funding and asset diversification. Under the Basel II accord, banks have adjusted their business models by diversifying their sources of income to avoid the obligation for keeping more capital; in contrast, a less developed financial market structure and a dependency on customer deposits are creating difficulties for banks in diversifying their funding and asset structure. Research limitations/implications - The banking sample are taken only from ASEAN countries. Practical implications - The findings provide important implication on the regulatory perspective, which is the implementation of Basel II framework induces higher intensity for the use of non-interest income activities. Including in these activities are trading and derivatives. Accordingly, the financial authorities should take with care the use of trading and derivatives products in the banking industry which is already embedded in current Basel framework, the Basel III Accord. Originality/value - The paper provides direct evidence on the impact of Basel II on bank business models in the emerging markets of ASEAN banking sectors.