Documente Academic
Documente Profesional
Documente Cultură
East Asia
July 2009
ABSTRACT
This study use balance panel data in analysing the determinants of bank capital ratio
for seven countries in East Asia. The results are consistent with the previous literature.
There is a strong positive relationship between bank capital and bank risk taking
behaviour. Besides, the result shows capital requirement pressure does not have an
influence of low capitalised banks. Liquidity, leverage and profitability show positive
link with the bank capital which support most of the bank literature. Finally, the
country macro variables seemly do not influence the target capital level. Specification
of banks type and ownership structure may be included in the future studies in bank
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ACKNOWLEDGEMENTS
It was my great privilege to have Dr. Rubi Ahmad as my supervisor. I would like to
express my utmost gratitute to Dr. Rubi for her thoughtful suggestions and guidance.
Without her insight, knowledge and assistance, this paper could not have been
completed. I cannot express the level of gratitude that I feel for the patience and
I would like to thank my family and friends for their support and encouragement
throughout my coursework. Of special mention here are my parents; their love and
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TABLE OF CONTENTS
ABSTRACT ............................................................................................................ II
ACKNOWLEDGEMENTS...................................................................................III
TABLE OF CONTENTS ....................................................................................... IV
LIST OF TABLES .................................................................................................VI
CHAPTER 1: INTRODUCTION ........................................................................... 1
1.0 STATEMENT OF THE PROBLEM .................................................................. 1
1.1 CAPITAL ADEQUACY FRAMEWORK ......................................................... 3
1.3 OBJECTIVES OF THE STUDY ..................................................................... 12
1.4 SCOPE OF THE STUDY................................................................................ 13
1.5 ORGANISATION OF THE STUDY ............................................................... 14
CHAPTER 2: LITERATURE REVIEW.............................................................. 15
2.0 EARLY RESEARCH...................................................................................... 15
2.1 DEFINATION AND ROLE OF BANK CAPITAL .......................................... 16
2.2 BANK CAPITAL MANAGEMENT ............................................................... 17
2.2 BANK CAPITAL AND BANK BEHAVIOURS .............................................. 18
2.4 RESEARCH ON DETERMINANTS OF BANK CAPITAL............................ 20
2.4.1 THE PRESENCE OF GOVERNMENT GUARANTEES ............................ 20
2.4.2 THE EFFECTS OF CAPITAL REGULATIONS ........................................ 21
2.4.3 SHAREHOLDERS AND MANAGERS’ RISK AVERSION.......................... 23
2.4.4 BANK EARNINGS OR CHARTER VALUE............................................... 24
2.5 EMPIRICAL FINDINGS ON ASIAN BANKS ............................................... 25
2.6 CHAPTER SUMMARY ................................................................................. 27
CHAPTER 3: DATA AND RESEARCH METHODOLOGY.............................. 28
3.0 RESEARCH HYPOTHESES.......................................................................... 28
3.1 RESEARCH METHODOLOGY .................................................................... 30
3.2 DEPENDENT VARIABLE – CAPITAL ADEQUACY RATIO (CAR) ............ 31
3.3 VARIABLES AFFECTING TARGET CAPITAL ............................................ 32
3.4 METHOD SELECTION................................................................................. 36
3.5 SAMPLING AND DATA COLLECTION ....................................................... 37
3.6 STASTICAL ESTIMATION AND INFERENCE ............................................ 38
3.7 CHAPTER SUMMARY ................................................................................. 39
CHAPTER 4: RESEARCH RESULTS ................................................................ 40
4.0 DESCRIPTIVE STATISTICS ......................................................................... 40
4.1 TEST OF MULTICOLLINEARITY ............................................................... 41
4.2 ANALYSIS OF VARIANCE........................................................................... 43
4.3 FINDINGS AND RESULTS ........................................................................... 44
4.4 SUMMARY AND DISCUSSION OF THE FINDINGS................................... 53
4.5 ROBUSTNESS CHECK................................................................................. 56
4.5.1 ROBUSTNESS CHECK – JAPANESE BANK EXCLUDED....................... 56
4.5.2 ROBUSTNESS CHECK – ANALYSIS BASED ON BANK SIZE................. 60
4.5.3 ROBUSTNESS CHECK – ANALYSIS BASED ON COUNTRY .................. 64
4.6 CHAPTER SUMMARY ................................................................................. 67
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CHAPTER 5: CONCLUSION AND RECOMMENDATION ............................. 69
5.0 OVERVIEW OF THE STUDY ....................................................................... 69
5.1 INTERPRETATION OF MAJOR FINIDNGS................................................. 70
5.2 LIMITATIONS OF THE STUDY ................................................................... 71
5.4 RECOMMENDATIONS FOR FUTURE RESEARCH ................................... 71
5.5 CHAPTER SUMMARY ................................................................................. 72
BIBLIOGRAPHY.................................................................................................. 73
APPENDICES ....................................................................................................... 76
A) OLS RESULTS IN EVIEWS................................................................................ 76
B) BANKS INCLUDED IN SAMPLE ........................................................................... 90
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LIST OF TABLES
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TABLE 37: SAMPLE BANKS OF JAPAN ........................................................................ 91
TABLE 38: SAMPLE BANKS OF KOREA ....................................................................... 93
TABLE 39SAMPLE BANKS OF INDONESIA ................................................................... 93
TABLE 40: SAMPLE BANKS OF MALAYSIA ................................................................. 94
TABLE 41: SAMPLE BANKS OF PHILIPPINES ................................................................ 95
TABLE 42: SAMPLE BANKS OF THAILAND .................................................................. 95
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CHAPTER 1: INTRODUCTION
The research problem of this study is centred on the determination of bank capital
level and the possible factors that affect the target capital level. This study is an
empirical exposition of how banking firms in East Asia set their capital ratios and
whether these capital decisions are related to their risk taking behaviours. The
analysis draws on the theoretical model of the multivariate panel regression model as
proposed by (Ahmad. R, Ariff, & Michael, 2008). This study extends the earlier
model to include the neighbouring countries of Malaysia in South East Asia and also
three countries in East Asia in order to investigate whether the setting of capital ratios
Most of the studies which examine the bank capital requirements and regulators
policy with respect to bank risk taking behaviours are using sample in United States
and European countries. We find that verification of the association between bank
capital regulations and managerial capital decisions is seldom researched using Asian
countries data although the effectiveness of regulatory framework and banking system
operations are often stressed as an important policy issue in regulating banks. In line
with similar research conducted on other countries, this paper aims at investigating
In the light of aforesaid discussion, the present paper seek to address the following
regulators during the test period, 2004-2007, did produce the required increase in
capital ratios in order to reduce risk. The empirical verification of the association
between capital regulations and bank managements’ capital decisions might provides
system operation. The countries in South East Asia adopted the Basel Committee on
ratio (CAR), which the adoption date of the eight Asian countries are as follow,
1993, China in 1994, and Philippines in 2001. In 1996, these countries again followed
the Basel Committee’s recommendation and incorporated market risk into its CAR
calculation except for Philippines in year 2002. These regulations were designed to
create a safe and sound banking system by strengthening capital adequacy. Therefore,
the empirical analysis also explores whether the regulations are able to obtain the
Secondly, this study attempts to investigate the link between bank capital and bank
risk simultaneously compares the results for the four South East Asia countries and
three East Asia countries. Following the framework introduce by (Ahmad et al., 2008),
the Basel 1988 risk-weighted capital adequacy ratio is used as a proxy for bank capital.
To identify the risk level of the bank, we used loan loss reserve ratio as the
measurement. Loan loss reserve ratio indicates the default risk level of the bank
Guttentag and Herring (1983) define the charter value as "the present value of the net
income the bank would be expected to earn on new business if it were to retain only
its office, employees, and customers. (...) [It] depends on the bank's authorized
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powers, including power to do business within specified areas, the market structure in
the area, the expertise of the bank's employees, and the customer relationships it has
developed". Over the twenty years prior to the Asian financial crisis in year
1997-1998, banks have enjoyed high earnings. Bank literatures show that bank
earnings is one of the important determinants of bank capital ratios. Also, high profit
and cost efficiency encourage the banks’ management to keep more capital from
Sauders and Wilson (2001) and Konishi and Yasuda (2003) find that in developed
countries, a high charter value would provide self-regulatory incentives for banks to
raise capital while at the same time also help to minimize their risk taking. Fisher et.
Al (2001) use data on commercial banks in Canada, Mexico and the United States to
test the disciplining role of charter value hypothesis in these three NAFTA countries
and find that no empirical support for the hypothesis in Canada and Mexico, and a
commercial banks. On the other hand, Kentaro (2007) discover that capital-risk
relationship is nonlinear and changes from positive to negative as franchise value falls.
There was no standard definition of capital before 1988. Since central banks used
different approach to measure capital, it was difficult to evaluate and compare the
financial position of banks in different countries. As a result, the concept of capital for
regulatory purposes was standardised in the first Basel Capital Accord (Basel I). Basel
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I was formulated by the BCBS at the Bank for International Settlements (BIS), an
financial co-operation and to serve as a bank for central banks around the world.
among banking organizations, 2) take off balance sheet exposure into explicit account
in evaluating capital adequacy, and 3) minimize disincentives to hold liquid and low
risk assets.
The Basel rules included a schedule for implementing the new system worldwide,
with a ratio of 8 percent, of which at least 4 per cent must be in the form of tier 1
capital. This framework aims to provide a common standard for safe and prudent
banking capitalization. Next section we will briefly present the adoption and
CHINA
In mid 1980s, the Big Four Banks, Agriculture Bank of China, Bank of China, China
Construction Bank, and Industrial and Commercial Bank of China were established as
fully state-owned enterprise. In China, capital was not clearly defined either as an
accounting concept or an economic concept for long time. The 1990s and the early
2000s, the Chinese banking system has started a reform process based on three main
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Identified the need to require banks to maintain a significant level of capital adequacy,
China began to apply capital adequacy requirement, which is also the first banking
law in China’s history, in year 1994 to commercial banks. Furthermore, the People’s
Bank of China (PBC), the central bank of china, sets the regulation that the risk
weighted capital adequacy ratio (RWCAR) may not be less than 8%, the tier 1 capital
not less than 4% and the supplementary capital may not exceed 100% of the tier 1
capital. Therefore China appears to have accepted of the Basel Capital Accord and
adapted it for the Chinese banking sector (Jin, 2003). In 1996, following the spirit of
Basel Accord I and China’s Commercial Bank law, the PBC published the important
states that, it is mandatory for the commercial banks to have a minimum risk weighted
JAPAN
Japan similarly adopted The Basel Accord which introduced in 1988. The capital
standard became effective in March 1989 and internationally active banks were
required to achieve the benchmark by December 1992. However, for Japanese banks
which operate domestically, the deadline was March 1993, the end of their accounting
year. (Ito & Sasaki, 2002) In detail, under the 1988 capital regulation requirements,
Japanese banks with international activities are obliged to keep capital of 7.25 percent
of risky assets by the time of March 1991, and 8 percent by the time of the deadline
March 1993. They are allowed to include up to 45 per cent of unrealized capital gains
on equity markets into the Tier 2 bank capital as long as the bank has enough Tier 1
5
In June 1996, a law implemented measures in order to strengthen Japan's regulatory
system. Banks had to provide self-assessment on the quality of loans and the capital
adequacy, which was followed by external audit and regular inspection of supervisory
The most important part of the law was the Prompt Corrective Action (PCA). It
required banks to strengthen their risk management, classifying their loan portfolio
rigorously, and allowed the regulators to force banks to take corrective measures, or
ultimately to close. The PCA also demanded that Japanese banks publish their capital
ratios. In early 1997, most of the major Japanese banks still did not meet the BIS ratio.
KOREA
In 1981, the Office of Bank Supervision in Korea first introduced capital adequacy
banks. However, in 1988 the guideline was changed from the capital-to-deposit ratio
minimum required capital ratio was at 6 per cent for nationwide city banks and 8 per
The Office of Bank Supervision realised that it was necessary to follow the Basel
Capital Accord guidelines to ensure the capital adequacy of Korean banks as well as
to make sure the Korean Banks are able to compete with international banks in global
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financial markets. Therefore, in July 1992, the Office introduced the risk-weighted
Korea implemented the Basle guidelines over a three year period. This result in
Korean commercial banks were required to maintain a capital ratio of at least 7.25 per
cent at the end of 1993, and to meet the full 8 per cent standard by the end of 1995.
The domestic banks find difficult to increase capital due to the slow growth in Korean
stock market after 1990, therefore, this result a longer transitional period. It was also
felt that the banks needed time to prepare and adapt for the new standards.
There is also other legal capital requirement that has been set in addition to the risk
requirements are 100 billion won (Korean currency) in the case of nationwide
commercial bank, and 25 billion won in the case of regional bank. On the other hand,
in the case of a branch of a foreign bank, the minimum paid-in capital requirements
are set at 3 billion won. Beside the obligatory minimum capital requirements, all
banks in Korea, including foreign bank branches, are obliged to maintain aggregate
MALAYSIA
In 1989, Bank Negara Malaysia introduced the capital adequacy framework (also
known as the Risk Weighted Capital Adequacy Framework). This framework was
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developed based on the international standards on capital adequacy introduced by the
Basel Committee on Banking Supervision (BCBS) in 1988 (known as Basel I). The
capital adequacy framework sets out the approach for the computation of minimum
capital adequacy framework can be divided into three broad categories which consist
of 8% at all times at the entity, global and consolidated level based on Basel I.
Malaysia incorporated market risk into its CAR calculation in respond to the
the capital adequacy requirement from 8 per cent to 10 percent. Based on the
guideline of Bank Negara, capital funds for domestic banking groups are calculated
based on the aggregate capital funds of the commercial bank and investment bank in
each group. Nevertheless, these banking groups are still given the flexibility to
determine the relative size of each entity within their groups as long as the aggregate
capital funds of all the entities amounts to at least RM 2 billion effectively start from
Bank Negara Malaysia intends to adopt Basel II in full by 2010 using a two-phased
approach. Phase 1 schedule to be implemented in January 2008; all banks are to adopt
the Standardised Approach for credit risk and Basic Indicator Approach for
operational risk. Bank Negara Malaysia may permit banks to remain on Basel I if they
intend to adopt the Internal Rating Based (IRB) Approach instead. Phase 2 will be
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that choose this approach. Banks on the Standardised Approach are not mandated to
INDONESIA
Pengawasan Bank (MDPB) which includes the Master Plan (MP) and the Detailed
Action Plan (DAP). Under the MP, Bank Indonesia, the central bank of Indonesia acts
as a sole regulator for the banking industry which conducts Special Surveillance (SS)
and On-Site Supervisory Presence (OSP) to the banks. In the period of 1988-1999,
series of bank reform packages as part of financial liberalisation was introduced over
these ten years period. To stabilise the competition among banks due to the financial
(PAKTO 1988). The Indonesian approach is fully consistent with the basic standards
laid down in the Basel Accord that banks were required to reach at a minimum of 8
per cent CAR by the end of December 1992, albeit many banks are unable to meet the
provide a breathing space for the banks and their borrowers. However, the CAR is
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which banks to go for the recapitalisation program, IBRA proposed three groups
appeared to have a lower capital regulation, the situation post crisis pushed the
THAILAND
The Bank of Thailand (BOT) has steadily enhanced the supervision and examination
framework of financial institutions in line with the standards set by the Basel
Committee on Banking Supervision (e.g. Basel Core Principles for Effective Banking
Supervision). The BOT has implemented the Basel Accord since the beginning of
1993. The minimum requirement of the capital adequacy ratio was initially set at 7
per cent and was gradually raised to 8.5 per cent in October 1996. Additionally, Tier 1
institutions infrastructures. At the present time, the BOT intends to move from the
capital adequacy framework under Basel I to the New Basel Capital Accord (Basel II),
2007. The new guideline for capital requirements will not only cover all the major
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risks faced by financial institutions, but will also be more reactive to the riskiness and
PHILIPPINES
In March 2001, the Bank Sentral ng Philippines (BSP) adopted the original Basel I
framework. Initially, this circular only provided guidelines for the computation of
risk-based capital for credit risk. The BSP’s risk-based capital adequacy framework
was further improved in December 2002, which required banks to measure and apply
capital charges against their market risk, in addition to their credit risk. On the
implementation of the Basel framework, the BSP imposes a minimum CAR of 10 per
cent on both domestic and foreign banks. This minimum required ratio of 10 per cent
was set higher than the Basel I or Basel II recommended ratio of 8 percent to consider
other risks not captured in the current framework. This requirement is applied on both
a solo and a consolidated basis. The calculation of capital charge for market risk is
also the same as that set in Basel I. It consists of Tier 1 and Tier 2 capital, where total
Tier 2 capital should not exceed Tier 1, and lower Tier 2 should not exceed 50 percent
of Tier 1.
Towards maintaining a healthy and strong banking system, plans include asset
clean-up and capital base build-up through compliance with International Accounting
2007 will be taken by the BSP. Basel II uses standardized approach for credit risk, and
basic indicator and standardized approaches for operational risk. Under the
standardized approach for credit risk, risk weights would mainly depend on the
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external rating of the counterparty. And also, under the basic indicator approach for
operational risk, capital charge is 15% of the 3-year average of a bank’s gross income.
The first objective of this study is to examine how East Asian Bank set their capital
ratios and the factors that influence the capital ratios. Total 238 banks from seven East
Asian will be included in the study. Out of the seven countries, four of them are South
East Asian countries, Malaysia, Thailand, Indonesia and Philippines and the
Since there are seven countries in the research sample, the second objective of this
study is to examine whether the setting of capital ratios heterogeneous across the
region. It is important to identify the similarities and differences among the countries
such as the behaviour of the domestic banks’ structure and also the rules set by the
domestic regulatory authorities. The differences between the countries may affect the
The third objective of this study is to examine whether the capital decisions are
related to banks’ risk taking behaviours. Evidence show that some of the banks in
developed countries will increase their exposure in risky investments to maintain the
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Finally, the financial institutions are heavily regulated because they play an important
role in the economy. The forth objective of this study is to examine whether the
banks.
This study required the use of data consisting of annual data of banks capital
adequacy ratio, and other variables affecting the target capital for seven countries that
represent the whole of Asian Bank for the period from 2004 to 2007. Since recent
studies on the relationship between bank capital and risk are remain unclear, thus, we
aim to extend our research to examine the direction of the relationship again.
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1.5 ORGANISATION OF THE STUDY
Chapter 1 introduces the Capital Adequacy Framework (Basel I), suggesting by the
in the sample countries. This chapter also highlights the importance of the study of
determinants of banks’ capital. Objectives and scope of this study also presented in
this chapter.
relationship between banks risk and capital, surveying previous researched conducted
in this area.
Chapter 4 provides results of the study, which includes analysis and explanations of
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CHAPTER 2: LITERATURE REVIEW
The aim of this chapter is to briefly and critically review the past theoretical and
empirical research done in the area of bank capital requirement. There has been
insides about the factors that affects the banks’ target capital ratio. However, empirical
work in this subject matter is still scanty in the East Asian country and seldom
researched.
This chapter begins with reviewing the early research on capital adequacy, the
definition of bank capital and the role of bank capital according to different sources.
We review the past literature by dividing the study area into four major categories.
First the bank capital management; second the bank capital and bank behaviours; third
the determinants of bank capital and fourth empirical findings on Asian banks.
analysed before. The earliest research on capital adequacy can trace back to 1977.
Kahane first examines the effectiveness of capital adequacy and the regulations
Santomero (1980) and Kim and Santomero (1988), using a mean-variance framework,
show that increased regulatory capital standards may lead banks to choose risky
On the contrary, Furlong and Keeley (1989) demonstrate that an increase in capital
reduces the value of the deposit insurance put option, thereby reducing the incentive
15
of banks to increase portfolio risk. This shows the empirical evidence on the
Banks play an important role in the global economy, and are the first category of
of a large number of banks or the failure of a small number of large banks could result
a chain reaction that may harm the stability of the financial system. As a result, lead to
The typical textbook explained that there is no need to investigate banks’ financing
“Banks also hold capital because they are required to do so by regulatory authorities.
Because of the high costs of holding capital […], bank managers often want to hold
less bank capital than is required by the regulatory authorities. In this case, the
2007, p.233).”
Thus, the decisions of the amount of capital that banks hold are made base on three
most common reasons. First, bank capital aids to prevent bank failure. A bank
maintains bank capital to reduce the chance of become insolvent. Banks will prefer to
have a sufficient capital to act as cushion to absorb the losses. Second, the amount of
capital affects returns for the equity holders of the bank. The higher the bank capital,
16
the lower the return that the owners of the banks. Because of there is a trade off
between the safety and the returns to equity holders, the bank managers had to set an
optimal level of bank capital. Third, a minimum amount of bank capital is required by
the regulators.
An important paper of Berger et al. (1995) discusses thoroughly about the reasons of
banks hold capital and also the role the capital of financial institutions. Different from
the others studies, the authors look at the ‘frictions consideration’ of setting bank
capital ratio. They find that taxes and the costs of financial distress, transaction costs
In the earlier section, we identify the reasons of banks hold capital and the role capital
mainly on U.S and European institutions. Moyer (1990) uses U.S Commercial banks
and examines whether banks use loan loss provisions and loan charge-offs, among
other variables, to adjust accounting numbers to improve the capital ratio. The results
find evidence that bank loan loss provisions and capital ratios are negatively related.
This is consistent with the hypothesis that use of loan loss provisions reduces
Chen and Daley (1996) using a simultaneous equations approach, examine regulatory
capital and earnings management effects on the loan loss provisions of Canadian
banks. The results suggest that loan loss provisions are used to manage the capital
ratio but not to manage earnings during the period 1977 to 1987. Ahmed, Takeda, and
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Thomas (1999), similar with Chen and Daley (1996), find that U.S banks managed
regulatory capital but not earnings during the changes in the capital adequacy
In contrast with the aforementioned findings, Collins et al. (1995) find results that
contradict Moyer (1990). They do not find support that is consistent with the
regulatory capital management. However, they find that there is a positive relationship
Regulators have increased their focus on the capital adequacy of banking institutions
to enhance the stability of the financial system in recent years after several financial
crises. In the past decades, an increasing branch of the theoretical literature has tried
to assess the effects of minimum capital requirements on capital and banks’ risk. We
review the relationship of bank capital and bank behaviours based on the two major
theories in this field; which are the moral hazard theory and the capital buffer theory
An increasing number of empirical papers (Shrieves and Dahl 1992; Jacques and
Nigro 1997; Aggarwal and Jacques 2001; Rime 2001) have tried to test the moral
hazard theory. The empirical literature has mainly tested the moral hazard theory,
building on a model developed by Shrieves and Dahl (1992). The majority of the
papers find a positive relationship between capital and risk adjustments, indicating
that banks that have built up higher capital, simultaneously, also increased risk. They
describe the problem of "gambling for resurrection": poorly capitalized banks select a
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risky asset portfolio at the cost of the deposit insurance system. Therefore, their
Besides studies on the moral hazard theory, there are several studies on banks reaction
to capital requirements focused on the alternatives theory, the capital buffer theory.
The capital buffer is the excess capital a bank holds above the minimum capital
requirement. The capital buffer theory implicates that banks with low capital buffers
attempt to rebuild an appropriate capital buffer and banks with high capital buffers
attempt to maintain their capital buffer. Frank Heid et al (2004) access how German
savings banks adjust capital and risk under capital regulation, and they find that the
coordination of capital and risk adjustments depends on the amount of capital the
Therefore, the moral hazard theory and the capital buffer theory have different views
for how banks adjust capital and risk under the minimum capital requirements. The
moral hazard theory expects that when capital requirements force banks to increase
capital, the reaction of the banks are to increase risk as well. By contrast, the capital
buffer theory expects that the behaviour of banks depends on the size of their capital
buffer. This means that banks with high capital buffers will aim at maintaining their
capital buffers while banks with low capital buffers will aim at rebuilding an
appropriate capital buffer. As a result, for banks with high capital buffers, capital will
be positively related to risk adjustment, whereas for banks with low capital buffer,
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2.4 RESEARCH ON DETERMINANTS OF BANK CAPITAL
There are several research draws from the previous studies strive to investigate the
determinants of bank capital. (Volker & Martin, 2008) analyse the determinants of
capital for German banking sector comprising of three characteristic banking groups
including savings banks, cooperative banks and other banks, which greatly differ
regarding their ownership and their access to the capital market compare to
Shrieves and Dahl (1992) with addition bank-specific effects i. The major findings
that related to this study are the authors find that; first, changes in portfolio risk are
significantly and positively affect the changes in the capital ratio for savings banks.
Second, banks’ profitability has a positive and significant impact on the target capital
ratio for savings banks and cooperative banks. Third, size has a negative impact on
Capital injection and bailed out by the government helps bank to lessen the risky
guarantees and deposit insurance, the banks continue to fail and go out of business
throughout the world. The numbers of banks which need bail out are also at alarming
unnecessary risk because to some extent they are not bound to repay their depositors.
Besides, deposits insurance promise to protect depositors from the threat of deposits
run. The cost of these deposit insurance and government guarantee also reduces
incentives for depositors to monitors their banks (Freixas and Rochet 1998).
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Berger et al. (1995) argue that government safety net guarantees reduce the incentive
to issue equity shares, causing market capital levels to be artificially reduced. Hence,
banks face a number of agency problems and associated moral hazard risks that
Demirguc-Kunt et al. (2002) provide evidence that explicit deposit insurance tends to
damage the bank stability, especially when bank interest rates are deregulated and the
countries have control the bank risk shifting incentive in recent years. They argue that
deposit insurance clearly aggravating risk shifting. Finally, it had adverse effects in
environment that are low in political and economic freedom and high in corruption as
Edizt, Micheal and Perraudin (1998) assess the effect of the Basel Capital Accord
supervisory data, they discover that when the capital ratio of the UK banks
approaches its minimum value required by the authorities, bank increase the capital
ratio in the following quarter. They observe that the increase in capital ratio of banks
is likely come from an increase in narrow capital and there is no evidence that UK
banks increase risk-taking in order to achieve and exceed the minimum target ratio.
The results also indicate that the capital requirements significantly affect the capital
ratio.
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Jürg Blum (1999) suggests that capital adequacy rules may increase a bank's riskiness.
The intuition behind the suggestion is that under binding capital requirements an
additional unit of equity tomorrow is more valuable to a bank. Therefore when raising
equity is very costly, the only possibility to increase equity tomorrow is to increase
risk today.
Hovakimian and Kane (2000) find capital regulation did not prevent large U.S. banks
from shifting risk onto safety net during 1985-1994. They argue that deposit insurance
and poor capital supervision encourage banks increasing their risk taking behaviour as
they can extract deposit-insurance subsidies. However, Aggarwal and Jacques (2001)
reports that US banks increased their capital ratio without increases in credit risk.
They concluded that the prompt corrective action (PCA) positively and significantly
affected capital ratio in both high capital and low capital banks, with a faster speed of
Similarly Rime (2001) examines the Swiss banks’ capital and risk behaviour. The
which close to the minimum regulatory standards tend to increase their capital ratio.
He suggests regulatory pressure has a positive and significant impact on capital ratio.
David van Hoose (2007) reviews the academic studies of bank capital regulations and
he finds previous literature are remain unclear towards the effects of capital regulation
on portfolio risk as well as the overall safety and soundness for the banking system.
22
This is because banks may make riskier asset choices in order to enlarge the “capital
cushion”. However, the literatures generally agree that the immediate effects of
constraining capital standard are likely to reduce the credit risk of the banks.
Capital regulation may influence the bank’ lending behaviors, in turn affect the banks’
portfolio risk. Kentaro (2007) finds that capital regulations do not prevent risk taking
behaviours as undercapitalized banks may issues more subordinated debts to meet the
capital requirements. However, the Kentaro doubt that, the issues of recapitalized
using subordinated debts may allow Japanese banks to swift their loan portfolio
towards more risky investments in real estate sector and worsened the non performing
loans problems.
The ownership structure may also affect the target capital level. Saunders, Strock and
controlled banks and managerially controlled banks. The limited liabilities of the
stockholders grant them incentive to increase the risk of the company. In contrast, the
banks’ manager decision on the amount of capital hold is influence by the degree to
their best interests. The results support their hypothesis where the stockholders
controlled banks show significantly higher risk taking behaviour than managerially
controlled banks. This entails that the regulators must increase examination for
Apart from this, Ronald C. Anderson and Donald R. Fraser (2000) present evidence
Managerial shareholdings are positively related to total and firm specific risk in the
23
late 1980s when banking was relatively less regulated and when the industry was
under considerable financial stress. In addition, Jeitschko and Jeung (2005) also
incentives are dominating factors in determining asset risk. In contrast to this, they
also point out the possibility that bank risk is positively correlated with capitalisation
Charter Value can also defined as the value of a bank being able to continue to do
business in the future, reflected as part of its share price. Demsetz et al. (1996)
suggest that franchise value plays an important role in banking because it helps
mitigate the moral hazard problem. In order to maintain the franchise value, this will
risky businesses besides meeting the minimum level required by the regulator. Their
empirical analysis supports the negative relationship of franchise value and risk. That
banks having a lower franchise value (alternative term for charter value) behave more
aggressively.
Additionally, Saunders and Wilson (2001) suggest that the relationship between
charter value and capital structure decisions is procyclical. Their regression results
show that during economic booms situation, high charter value banks posses a higher
capital ratio. Nevertheless, during economic recessions, higher charter value banks
uphold higher losses of charter value. The most important finding of this paper is that
charter value may not able to lessen the amount of risky activities that banks involved.
24
2.5 EMPIRICAL FINDINGS ON ASIAN BANKS
The last section of this chapter reviewed some major empirical studies based on Asian
banks sample. Song (1998) examines Korean banks’ responses to the Basel risk
that the higher capital requirements were generally effective because Korean banks
generally did not much utilize “cosmetic” adjustments to increase their capital ratios.
Likewise, S. Ghosh et al. (2003) find that Indian public sector banks have not resorted
government securities for high risk loans in order to meet their capital requirement.
This shows shat capital regulation does influence the banks decisions making.
Yu (2000) documents bank size; liquidity and profitability are the main determinants
of bank capital ratio in Taiwan. The author summarises that large banks in Taiwan
have much lower capital ratios than the small banks which is consistent with the
previous study where the large banks feel that they are “too big to fail”. The author
also suggests that the banks mainly use internal source of capital, this contributes that
more profitable banks tend to have higher capital ratios. The remarkable finding of
this paper is the relationship between the equity-to-asset ratio and the liquidity ratio is
significantly positive for small banks, but significantly negative for medium size
banks.
Ito and Sasaki (2002) investigate how Japanese banks responded to the introduction of
BIS based capital regulation and to the decline in stock prices. They found that
Japanese bank reduced lending and increased levels of subordinated debt to maintain
their capital adequacy ratios between 1990 and 1993. Kentaro (2007) also finds that a
25
capital adequacy requirement did not prevent risk-taking behavior of undercapitalized
banks since they then just issued more subordinated debts to meet this requirement.
Jeitschko and Jeung (2008) build a testing model that incorporates the three different
incentives of the three entities that are involved in the risk determination of a bank.
Based on empirical findings on Korean commercial banks, they propose that capital
regulation alone may not be enough to safeguard the sound banking business of banks
since high capital banks present positive relationship in bank capitalisation and
portfolio risk. Secondly, the negative relationship between risk and capitalisation for
commercial banks with low capital suggests that the closer monitoring
risky activities.
One of the latest local empirical study by Ahmad, R. , Ariff, & Michael, (2008), as
well as the main reference of this study, reports new findings on determinants of bank
regulatory capital and banks’ risk taking behaviour. The study also observes that
mandated in 1997 are proved successful in the financial crises period. Also, the study
finds inconsistency with developed country literature where results shows that bank
26
2.6 CHAPTER SUMMARY
This chapter begins with reviewing the early research on capital adequacy started in
enforcing to the financial intermediaries. Next, this chapter provides the definition of
bank capital and role of bank capital according to different sources. Studies on bank
capital management are predominantly based on U.S banks. The relationship between
bank capital and bank behaviours are discussed based on both the moral hazard theory
and capital buffer theory. There is little consensus among the reviewed literature that
determinants of bank capital are discussed in four subsections which are the presence
managers’ risk aversion and bank earnings or charter value. The final section of this
chapter provides the major findings for the Asian banks for this research area. Similar
to the U.S banks, the evidence of the effectiveness of the capital adequacy regulation
27
CHAPTER 3: DATA AND RESEARCH METHODOLOGY
This chapter describes the research hypotheses and methodology used in the study.
This included a discussion on the data used in the study, data source, data collection
procedures, statistical techniques used to analyze the research data and formulation of
the hypotheses. Apart from this, the priori of the direction of the variables will also be
According to the capital buffer theory, banks will to hold a certain amount of excess
capital above the minimum level set by the regulatory bodies. The reasons behind
their aim to maintain a certain capital buffer are the explicit and implicit regulatory
costs, which would be the result of falling very close to or below the regulatory
minimum.
With the rationale discussed in chapter 2, the hypotheses of this study can be
established as followed. The hypotheses are developed in a null and neutral form, and
H1: Credit Risk has no statistically significant impact on banks’ target capital ratio
H1a: 1 = 0
H1b: 1 0
28
H2: Management Quality has no statistically significant impact on banks’ target
capital ratio
H2a: 2 = 0
H2b: 2 0
H3: Bank Liquidity has no statistically significant impact on banks’ target capital ratio
H3a: 3 = 0
H3b: 3 0
H4: Bank Size has no statistically significant impact on banks’ target capital ratio
H4a: 4 = 0
H4b: 4 0
H5: Bank Leverage has no statistically significant impact on banks’ target capital ratio
H5a: 5 = 0
H5b: 5 0
H6: Bank Profitability has no statistically significant impact on banks’ target capital
ratio
H6a: 6 = 0
H6b: 6 0
29
H7: Regulatory pressure has no statistically significant impact on banks’ target capital
ratio
H7a: 7 = 0
H7b: 7 0
Building on Ahmad, R. , Ariff, & Michael, (2008), and slightly modified form of
models, this study formulate a multivariate panel regression model. The model is
derived to find the level of bank capital of bank i in period t as a function of a range of
+ ε i, t (1)
where:
REG i, t : a dummy variable: one denotes low capital bank and 0 otherwise,
ε i, t is the residual term, included to reflect all other market imperfections and
30
regulatory restrictions affecting bank capital ratio.
The following section discusses each of these variables and their expected impact on
As stated earlier in the background of the study, banks must maintain two risk-based
capital requirements which are the ‘tier 1 requirement’ as well as the ‘total capital
adequacy ratio of 8 per cent is used as the proxy for bank capital ratio in this study.
(Jacques and Nigro, 1997; Ediz et al, 1998; De bondt and Prast, 2000; Rime, 2001).
For banks, tier 1 capital consists primarily of ordinary paid-up share capital and share premium,
statutory reserve fund, general reserve fund and retained earnings, whereas tier 2 includes general
loan loss provisions, subordinated debt, and other hybrid capital. The amount of risk weighted
assets would be compute from different categories of assets and off-balance sheet exposures,
weighted according to broad categories of relevant riskiness. The classification of risk weights is
31
3.3 VARIABLES AFFECTING TARGET CAPITAL
Eight explanatory variables from the literature are selected as the determinants of
bank capital; six bank specific variables (LLR, NIM, LACSF, EQTL, and SIZE), two
country macro variables (RGDP and BASE) and one regulatory factor (REG). Their
selection criteria and a priori expectations of expected relationship with bank capital
In this study, we employ accounting based model of bank risk are rather than market
based one. This is because most of the banks in the study are non-listed company. The
first accounting risk measurement is the Loan Loss Reserve (LLR). LLR defined as a
valuation reserve against a bank's total loans on the balance sheet, representing the
consider Loan Loss Reserves to gross loans ratio as a proxy of bank risk as this ratio
may indicate the banks’ financial health. A negative impact of LLR in capital could
mean that banks in financial distress have more difficulties in increasing their capital
ratio. In contrast, a positive effect could signal that banks voluntarily increase their
Net interest margin is defined as the ratio of net interest income to average earning
assets. It is a summary measure of banks' net interest rate of return. While it is well
known that the net interest margin is a significant element of bank profitability,
however the effects of market interest rate volatility and default risk on the margins
are not well recognized. The net interest margins are set by banks to cover the costs of
intermediation besides reflect both the volume and mix of assets and liabilities. More
32
specifically, adequate net interest margins should generate adequate income to
increase the capital base as risk exposure increases. (Angbazo, 1997). The charter
management quality and bank capital. However, bank management may reduce the
capital cushioning if the default risk is very low. As a result, the coefficient of NIM
Bank size, as measured by the log of total assets because bank size may also
influences the amount of bank capital. Jackson et. al (2002) propose that the large
banks wish to keep their good ratings and therefore have considerable
market-determined excess capital reserves. However, most recently, Gropp and Heider
(2007) and earlier Shrieves and Dahl (1992) found that a banking organization’s
means that larger banks have lower CARs. This may occur because firm size might
their risk exposure. So, the coefficient of SIZE can have either a positive or negative
sign.
A liquid asset to customer and short term funding are included to proxy bank liquidity.
Angbazo, 1997 states that as the proportion of funds invested in cash or cash
premium in the net interest margins. Therefore, an increase in bank liquidity (high
The final bank specific variable is the bank leverage factors which proxy by the total
33
equity to total liabilities ratio. A high EQTL denotes low leverage whereas a low
EQTL indicates high leverage. Shareholder will find high leveraged banks are more
risky compared to other banks, therefore this increase required rate of return of the
shareholders. Consequently, the high leveraged banks (Low EQTL) may find raising
new equity difficult due to the high cost of equity capital. Ultimately, the high
leveraged banks may hold less equity than low leveraged banks. We expect the
Profitability also influences a bank’s capital ratio. Gropp and Heider (2007) find that
more profitable banks tend to have more capital relative to assets. In general banks
have to rely mainly on retained earnings to increase capital. ROA and the capital ratio
is most likely positively related, because a bank is expected to have to increase asset
risk in order to get higher returns in most cases (Jeitschko and Jeung, 2007). Hence,
the bank’s return on assets (ROA) in the capital equation is included as a measure of
capital ratios. A bank having a capital ratio close to the regulatory minimum may have
an incentive to increase its capital ratio to prevent the ratio from falling below the
regulatory minimum. The dummy variable, REG is deal for banks with CAR less than
the industry wide average calculated by the central bank, zero otherwise.
A country’s growth and the extent to which its financial system is bank based are
34
cycles may influence the level of CAR, as capital holdings may change over time to
possible increases in the write-offs and provisions. Banks may therefore take
precautionary measures by holding more capital, and those relying on credit rating to
gain access to capital markets may also need to raise their capital holdings to maintain
their ratings during a downturn. In an upturn, risks are less likely to materialise and
banks can safely hold less capital. One could then expect that during a downturn
A financial system which is more bank-based or more market-based could reflect the
degree of competition within the system. Schaeck and Cihak (2007) show that banks
tend to hold higher capital ratios when operating in a more competitive environment.
This is consistent with the observation that more bank-based in an economy, there is
less competition from capital markets and therefore the bank insolvency risks are
smaller.
Table 1 shows the summary of the selected bank specific variables that affect the
target bank capital. The expected relationship between the bank specific variables and
35
3.4 METHOD SELECTION
Since the characteristic of data involve cross sections and time series, i.e panel data,
the most appropriate statistical method should be the pooled regression. According to
Hsiao (1986), the panel data sets have several main advantages over conventional
cross-sectional or time-series data sets. First, they contain more degrees of freedom
and more sample variability than cross-sectional data which may be viewed as a panel
Second, they allow a researcher to analyse several important economic questions that
cross-sectional data is not able to distinguish between two possibilities, but panel data
can because the sequential observations for a sample contain information about two or
more possibilities. Similarly, a single time-series data set regularly cannot provide
precise estimates of dynamic coefficients without specifying a priori that each of them
is a function of only a very small number of parameters. Therefore panel data are
Third, the use of panel data set also provides a way of resolving or reducing the
magnitude of a key econometric problem that often arises in empirical studies, e.g.
omitted or unobserved variables that are correlated with explanatory variables. Panel
data contain information on both the intertemporal dynamics and the individuality of
the entities may allow one to control the effects of missing or unobserved variables.
36
3.5 SAMPLING AND DATA COLLECTION
To empirically test the determinants of bank capital ratio, a balanced panel of data
from Asian banks' balance sheets and income statements for fiscal years 2004-2007
were used. Annual data obtained from the Bankscope database of the Bureau van Dijk.
Standard reports available in the Bankscope database of the Bureau van Dijk were
In expanding the previous study which used Malaysian banks sample, this study adds
Philippines on top of three East Asia countries namely China, Japan and South Korea.
First, these countries are selected of their geographic location which is located in East
Asia. Secondly, the countries have a relatively comparable financial system, for this
reason, countries such as Myanmar, Laos, Cambodia and some others are excluded in
this study. Third, in order to get standardize figures for comparison purposes, data are
only obtain from one source which is the Bankscope database of the Bureau van Dijk.
only one Singaporean bank which has complete data in the database so we have no
The study covers four years from 2004 to 2007. This time period was selected to
observe the determinants of the bank capital ratios after the Asian financial crisis.
Besides, the time period from 2004 to 2007 was determined after considering the
following two reasons. First, Philippines only adopted Basel I in 2002. Second, in
these four years, most of the countries in the sample were preparing themselves to
37
The banks were screened in two ways. First, we must ensure that each bank have
the bank must exist consistently from 2004 to 2007. Similarly, all the accounting
variables must fall within the range of -100 percent and +100 percent and therefore
extreme values of reported data due to possible reporting errors will be excluded from
the sample.
The final sample of study consists of 238 banks, with 109 Japanese Banks, 26 Chinese
The data analysis process here involved editing, coding, carrying out checks and
finally summarizing the findings. The statistical package EViews version 5.0 was used
Based on the analysis of variance (ANOVA), the F-value of the regression shows how
well the set of explanatory variables in the model is related to the dependent variable
at a cut off level of significance (). If the regression’s F – value is greater than the
critical F – value with = 0.05, then there is a significant relationship between the
explanatory variables and the dependent variable. The probability of the F – value for
38
the regression indicates how important the independent variables are explaining the
variable. The necessary of each independent variable in the model can therefore be
reviewed. The t-value is used to test the hypothesis that there is no linear relationship
between the dependent variable and independent variables. The t-value considers
other variables in the regression model. Similar to the F – value, the test of significant
parameter is based on the t – value measured against the critical t – value with =
0.05
This chapter started with formulating seven hypotheses of this study. This study
Michael, (2008). Next, the dependent variable and the independent variables
determination and their expected impact on bank capital are discussed in the third and
forth section of this chapter respectively. Panel data sets are used as they have three
main advantages over conventional cross sectional or time series data sets. Annual
data for the selected 238 banks from 2004 to 2007 were obtained from the Bankscope
database of the Bureau van Dijk. The banks were screened by the existence of the
banks and the range of accounting variables. The statistical package EViews version
5.0 was used mainly in data analysis. Test of significant relationships and test of
significant parameters are the two main resultant statistical inferences that will be
39
CHAPTER 4: RESEARCH RESULTS
This chapter presents the results of the study. It starts with a description of the general
data set used, followed by an analysis and discussion of the relationship that exists
Table 2 and 3 present the descriptive statistics and the pair-wise correlation matrix of
non-dummy variables
40
The results exhibit in Table 2 shows that the banks hold average capital ratio of
13.46% which is relatively higher than the 8% that set by the Basel Committee.
Table 3: The Pairwise Correlation Matrix for dependent variables and explanatory non
dummy variables
controlling for the others tends to be less accurate than if independent variables were
uncorrelated with one another. In statistics, the variance inflation factor (VIF) is a
index which measures how much the variance of a coefficient (square of the standard
Y = β0 + β1 X1 + β2 X 2 + ... + βk Xk + ε (3)
41
Step 1:
Calculate k different VIFs, one for each Xi by first running an ordinary least square
regression that has Xi as a function of all the other explanatory variables in equation
(3).
X1 = c0 + 2 X2 + 3 X3 + … + k Xk+ ε (4)
Step 2:
Then, calculate the VIF factor for i with the following formula:
1
VIF ( i ) (5)
1 Ri2
Step 3:
Analyze the magnitude of multicollinearity by considering the size of the VIF ( i ) . A
common rule of thumb is that if VIF ( i ) > 5 then multicollinearity is high.
42
To ensure no serious multicollinearity problem, step 1 to step 3 are performed. Table
Table 4 shows that none of the R-squared from these equations are near to 1.0 and the
variance of inflation factor (VIF) is less than 5. Since VIF < 5, thus we can conclude
The relationship between capital ratio and its determinants is examined with an
stated in chapter 3.4. The ANOVA F-tests is summarized in Table 5 which presents the
That is, it gives the probability that all effects of the given determinants are zero.
43
Anova F-statistic (6, 6657) 1087.888 0.0000
Analysis of Variance
Category Statistics
Std. Err.
Variable Count Mean Std. Dev. of Mean
CAR 952 13.45799 7.375411 0.239038
EQTL 952 8.350588 6.529530 0.211623
LASCF 952 20.06831 12.74313 0.413007
LLR 952 3.314170 3.565823 0.115569
NIM 952 2.777574 1.794236 0.058152
SIZE 952 8.806542 2.677424 0.086776
ROA 952 0.749921 0.980487 0.031778
All 6664 8.217871 8.951767 0.109658
Since the F – value is greater than the critical F – value with = 0.05, the results
LASCF, LLR, NIM, SIZE, ROA) and the dependent variable (CAR).
Equation (1) is estimated using panel data techniques in addition to pooled ordinary
least squared methods. The panel data model is written in matrix notation
44
Where it is a random term which comprised of two components, ' it refers to the
disturbance.
Table 7 reports the regression results of estimating the relation between the Risk
Weighted Capital Adequacy ratio and bank specific factors. In this study, we employ
the Glesjer Lagrangian multiplier test for random effects to validate the exogeneity of
the individual effects with the explanatory variables. The result is shown as in Table
6.
45
At = 0.05, 2 (6) =12.5916 , Decision: reject H0, there is heteroskedasticity.
Since the Glesjer test reject the hypothesis that the unobserved individual
heterogeneity is uncorrelated with the explanatory variable. This suggests that the
firm-specific effects and other variables in the model are correlated and so the fixed
The regression model takes account of time and firm fixed effects (ct and cf) to
consider the unobserved heterogeneity at the country level and across time that may
be correlated with the explanatory variables. Standard errors are clustered at the bank
level to account for heteroscedasticity and serial correlation of errors (Petersen, 2007)
The regression results are shown in columns (1) – (6) Table 7 for the capital adequacy
ratio. Column (1) shows the results for a basic model that specifies capital adequacy
ratio only as a function of bank-specific factors plus year-fixed effects. Next, the
model expanded to include country fixed effects in column (2) and then firm fixed
effects in column (3). Column (4) – (6) further include country macro variables. The
impact of the country macro variables can be measured by comparing the results of
46
Table 7: Determinants of capital ratio
The dependent variable is the risk-weighted capital adequacy ratio (CAR). The explanatory variables include six bank specific variables (LLR,
NIM, LASCF, SIZE, EQTL, and ROA), one dummy variable representing regulatory pressure (REG), and 2 country macro variable (BASE and
RGDP). LLR refers to the loan loss reserves to gross loan ratios. NIM and LASCF are the net interest margin and the ratio of total liquid assets
to total deposits respectively. SIZE represents the natural logarithm of total assets. EQTL is the ratio of total equity to total liabilities; ROA is the
return on average assets. The dummy variable REG refers to regulatory pressure, denoted by 1 for low capitalized banks and zero otherwise.
Two country macro are BASE represents the financial systems of the country and also RGDP refers the real gross domestic products growth of
the country. Total number of observations is 952. Reported in parentheses are robust standard errors. * indicates significance at the 10% level, **
Variables CAR
(1) (2) (3) (4) (5) (6)
Constant 4.8401*** 6.2690*** 11.98769*** 5.0941*** 4.9000*** 19.17248***
(6.078098) (6.6752) (2.882364) (6.0546) (2.7910) (3.814857)
Bank Specific
LLR 0.1780*** 0.1962*** 0.177985*** 0.1870*** 0.1942*** 0.152149***
(4.1250) (4.1933) (3.277964) (4.3063) (4.1431) (2.782292)
NIM 0.0475 -0.6861*** -0.312744* -0.0252 -0.6901*** -0.377584**
(0.4651) (-5.1929 (-1.818824) (-0.2257) (-5.2092) (-2.177672)
LASCF 0.0711*** 0.029272** 0.056081*** 0.0760*** 0.0297** 0.054706***
(5.7720) (2.1681) (4.51841) (6.0047) (2.1900) (4.377597)
SIZE 0.0198 -0.1383* -0.447373 0.0586 -0.1418* -1.558357**
(0.3147) (-1.6713) (-0.986268) (0.8661) (-1.7100) (-2.520287)
EQTL 0.6712*** 0.6379*** 0.530283*** 0.6730*** 0.6375*** 0.500944***
(23.1910) (22.5493) (14.4946) (23.1335) (22.5119) (13.30527)
ROA 1.2069*** 1.2961*** 0.407843*** 1.2384*** 1.2924*** 0.385486***
(5.8030) (6.3834) (2.984583) (5.8427) (6.3600) (2.8327***)
REG -3.1518*** -2.9419*** -2.498177*** -3.1137*** -2.9346*** -2.407661***
(-5.2363) (-4.9790) (-5.393705) (-5.0779) (-4.9569) (-5.184921)
Country Macro
RGDP 0.1146 0.2256 0.036864
(1.0670) (0.8102) (1.457126)
BASE -0.0310* 0.0073 0.414991***
(-1.7260) (0.8504) (2.725836)
48
Baseline model results
Column (1) of Table 7 shows the impact of bank-specific factors on the capital
adequacy ratio, without country fixed effects and firm fixed effects. All the bank
specific variables are positively related to the capital adequacy ratio. However, only
LLR, LASCF, EQTL and ROA show statistically significant to the model. The Wald
test is used to provide a test of whether the bank specific variables collectively made a
As shown in Table 8, the test statistic is 272.492, statistically significant at better than
the 1% level, signifying that the bank specific variables collectively do make a
Wald Test:
Equation: Untitled
requirements may have caused the low capital banks to reduce their capital adequacy
ratio.
Column (2) of Table 7 adds country fixed effects to the specifications in column (1).
The omitted country is Thailand and thus the country coefficients are measured
relative to Thailand. The results in column (2) are almost similar with column (1)
except for NIM which now has a negatively and statistically correlated with the
capital adequacy ratio. After adding country fixed effects in the model, SIZE become
statistically and positively correlated with the capital adequacy ratio. The rest of the
variables in column (2) share the results with column (1). In column (2), 4 of the 6
country binary variables are significant at 1% significance level, and all of them are
positively correlated with the capital adequacy ratio. The Wald statistic of 18.3771,
shown in Table 9 indicates that the country binary variables collectively make a
Wald Test:
Equation: Untitled
50
C(10) 2.158586 0.942708
C(11) 1.628129 1.057190
C(12) 7.654563 0.901008
C(13) 3.102445 0.928294
C(14) 3.785390 0.869888
significance at 0.01 level. This indicates that high regulatory requirements may have
caused the low capital banks to reduce their capital adequacy ratio.
For comparison purposes, individual firm fixed effects are also included. The results
in column (3) are qualitatively similar to column (2); with all the independent
variables have the same direction of relationship with the target capital level.
Interestingly, now SIZE is not statistically significant related to the target capital level.
Hence, bank size seemly not a determinant of bank capital for the banking institutions.
However, we notice that with firm fixed effects specification, the Adjusted R-square
and also Durbin-Watson stat improve from 0.6992 to 0.9174 and 0.4653 to 2.051
51
Model results with country macroeconomic variables
Column (4) excludes country binary variables and includes two country
macroeconomic variables, the real GDP growth and the ratio of aggregate bank assets
to nominal GDP. The coefficient of the BASE is negative and significant at 10%
significant level. The RGDP is not statistically significant related to the capital
adequacy ratio. The Wald test statistic is 1.5995, not statistically even at 10%
significance level, shown in Table 10. The result implies that the capital adequacy
ratio is not affected by the two selected country macroeconomic variables. Moreover,
the adjusted R-squared statistics declined. This suggests tat the country effects picked
up in column (2) are more than just these two macroeconomic variables.
Wald Test:
Equation: Untitled
added country fixed effects specification and firm fixed effects specification
respectively. These two model provide similar results with column (4) and both the
Only results of column (3) which the model included the firm fixed effects and period
fixed effects specification are discussed in this hypotheses testing section because the
model provides the best results. Apart from this, column (3) is selected due to the
study do not specifies the type of financial institutions and the ownership structure of
Hypotheses testing
H1: Credit risk has no statistically significant impact on banks’ target capital
ratio
High amount of loan loss reserve is commonly signifying a high risk because the
bank expects the loans will default. This also implies that the worse the financial
health of the bank, the higher is the bank’s target capital ratio. The coefficient of
variable LLR is statistically significant at the 0.01 level, and has a positive sign. This
explains that banks increase capital when increasing credit risk and vice versa in
order to maintain their capital buffer. A positive effect also signals that banks
voluntarily increase their capital to a greater extent in order to overcome their bad
financial situation. This is consistent with the evidence from the US banking sector by
Shrieves and Dahl (1992), Jacques and Nigro (1997) and Aggarwal and Jaques (1998)
53
as well as by Rime (2001) from Switzerland seems to confirm this positive
relationship.
capital ratio
The management quality is proxied by the NIM shows a negative impact on target
capital ratio, significance at 0.1 level. The coefficient of NIM shows that a one unit
increase in net interest margin decreases the bank capital by 0.0561 unit according
column (3). This is inconsistent with Angbazo, L. (1997) which predicts a positive
capital ratio
The coefficient of variable LACSF has positive sign and reject null hypothesis at 1%
significance level. This is consistent with the findings of Volker & Martin (2008) for
implies that banks do not treat liquidity as a substitute for capital for self-insurance
H4: Bank Size has no statistically significant impact on banks’ target capital
ratio
Table 6 shows SIZE has a negative relationship with capital ratio. However, it is
insignificant; bank size appears not a determinant of bank capital in the East Asia
region. This is inconsistent with the studies in developed countries (Shrieves and
Dhal, 1992; Ediz et al., 1998; Jacques and Nigro, 1998; and Rime, 2001) as well as in
Taiwan (Yu, 2008). On the other hand, this result is in line with our main reference
54
(Ahmad, R. , Ariff, & Michael, 2008).
capital ratio
EQTL has a positive coefficient and statistically significant at 0.01 level. This means
the high leverage bank which has a low EQTL will hold less equity capital. It is
consistent with our initial priori because high leveraged bank may find raising new
equity difficult and thus hold less equity than low leveraged banks. This also show
capital ratio
Examining the relationship between bank profitability and bank capital, column (3)
suggests that earnings is statistically and positively influence the banks’ target capital
level. The possible explanation to the result is that the bank managements reduce the
ratio
Column (3) provides us the relationship between regulatory pressure and bank capital
is negatively and statistically significant at 0.01 level. This is consistent with Jacques
and Nigro (1997) also Ahmad, R., Ariff, & Michael (2008) which means that low
capitalized banks may reduce their capital ratio due to the high capital regulatory
requirements.
55
Summary of Hypotheses Testing
We checked the robustness of the results along three additional dimensions. First, we
run the regressions separately for Japanese banks and non-Japanese banks. It is
because the test sample consists of large numbers of Japanese Banks. The results are
shown in Table 11. Secondly, we run the regressions according to the size of the bank,
shown in Table 12 and finally we run the regressions separately for each of the
Total Japanese bank included in the research sample are 109 banks, therefore, it is
interesting to analyse whether the results shown earlier in the full model are largely
influenced by the Japanese banks. To further analyse the robustness of the model, we
compare the results in Table 7 with Table 11. We notice that even we omitted Japanese
Banks; the model still provides us similar results. Referring to Column (3), LLR is
statistically significant and positively related to capital ratio for both tables. NIM is
negatively related to capital ratio significance at 0.1 level for both original model and
robust check model. For LASCF, EQTL, and ROA, all of them are having the same
positive relationship and statistically significant. Similarly, both model show SIZE is
insignificant. The robustness model shows no significant difference with the proposed
research model indicates the proposed model is a reliable model. The result is not
largely influence by the Japanese Banks as the sample in this study consists of almost
57
Table 11: Determinants of capital ratio (Robustness Check, without Japanese Banks)
The dependent variable is the risk-weighted capital adequacy ratio (CAR). The explanatory variables include six bank specific variables (LLR,
NIM, LASCF, SIZE, EQTL, and ROA), one dummy variable representing regulatory pressure (REG), and 2 country macro variable (BASE and
RGDP). LLR refers to the loan loss reserves to gross loan ratios. NIM and LASCF are the net interest margin and the ratio of total liquid assets
to total deposits respectively. SIZE represents the natural logarithm of total assets. EQTL is the ratio of total equity to total liabilities; ROA is the
return on average assets. The dummy variable REG refers to regulatory pressure, denoted by 1 for low capitalized banks and zero otherwise.
Two country macro are BASE represents the financial systems of the country and also RGDP refers the real gross domestic products growth of
the country. Total number of observations is 952. Reported in parentheses are robust standard errors. * indicates significance at the 10% level, **
Variables CAR
(1) (2) (3) (4) (5) (6)
Constant 4.6840*** 5.9889*** 14.9764* 4.8332*** 3.5536 14.8002*
(4.0180) (4.8071) (1.9426) (3.1117) (1.1237) (1.9314)
Bank Specific
LLR 0.1706*** 0.2092*** 0.17456** 0.1768*** 0.2057*** 0.1358*
(2.9379) (3.3664) (2.3950) (3.0221) (3.2960) (1.8510)
NIM -0.0038 -0.7100*** -0.4017* -0.0931 -0.7102*** -0.4615**
(-0.0263) (-3.9438) (-1.7389) (-0.5592) (-3.9386) (-2.005)
LASCF 0.0705*** 0.0217 0.0669*** 0.0745*** 0.0224 0.0676***
(4.0593) (1.1362) (3.5664) (4.2147) (1.1706) (3.6385)
SIZE 0.0174 -0.2218* -0.6700 0.0680 -0.2229* -1.5295
(0.1990) (-1.7961) (-0.7531) (0.7040) (-1.8022) (-1.5771)
EQTL 0.6935*** 0.6586*** 0.5066*** 0.6969*** 0.6587*** 0.4780***
(17.0821) (16.58985) (9.9037) (16.9219) (16.5683) (9.2936)
ROA 1.3928*** 1.5635*** 0.5412** 1.4061*** 1.5391*** 0.4524*
(4.1165) (4.8589) (2.3133) (4.1470) (4.7574) (1.9393)
REG -4.3353*** -4.5229*** -5.5648*** -4.4823*** -4.3233*** -4.6753***
(-3.5902) (-3.6775) (-5.4023) (-3.5004) (-3.4144) (-4.3244)
Country Macro
RGDP 0.1414 0.2860 0.5893***
(0.8276) (0.7024) (2.6787)
BANK 0.0308 0.0410 0.0944**
(-1.2338) (0.5396) (2.1539)
Country Fixed Effects No Yes No No Yes No
Firm Fixed Effects No No Yes No No Yes
Year Fixed Effects Yes Yes Yes Yes Yes Yes
SSE (Sum squared resid) 15623.07 13875.87 2893.53 15575.40 13856.28 2818.84
Adjusted R-square 0.6114 0.6514 0.9036 0.6111 0.6505 0.9056
Durbin-Watson stat 0.4312 0.4857 2.0883 0.4341 0.4829 2.1190
F-Statistic 82.0386*** 65.1666*** 35.9807*** 68.3140*** 57.3923*** 36.28423***
Number of Observations 516 516 516 516 516 516
59
4.5.2 ROBUSTNESS CHECK – ANALYSIS BASED ON BANK SIZE
This study continues examines the robustness of the model by analysing the factors
which influence the bank capital ratio for different bank size. The 238 banks are
divided into three categories according to its size which is the natural logarithm of
total assets. 25 percent of the banks which have the largest figure of log of total assets
are consider large banks, 25 percent of the banks which have the smallest figure of log
of total assets are consider small banks. The remaining banks are categorised as
medium banks.
The results are shown in Table 12 and only the impact of bank-specific factors and
regulatory pressure on the capital adequacy ratio were examined. For the large banks,
only EQTL and REG show significant impact on capital adequacy ratio. EQTL is
positively related to capital adequacy ratio and REG is negatively related to capital
Next, for the medium banks, LLR, LASCF, EQTL, ROA and REG give significant
influence on capital adequacy ratio. LLR, LASCF, EQTL and ROA are positively
significant to the capital adequacy ratio at 1% significance level. Likewise, REG also
As for the small banks, LASCF, EQTL and ROA are positively related to capital
adequacy ratio; significant at 0.01, 0.01 and 0.10 level respectively. Regulatory
pressure proxied by REG variable shows significant negative relationship with capital
adequacy ratio. This is consistent with the results of the large and medium banks.
The regression results report that the relationship between the bank specific and
regulatory pressure variables and the dependent variable for each the three categories
of banks. After separating the bank sample into three categories, the direction of the
relationship between the bank specific variables and the capital adequacy ratio remain
the same. Especially EQTL and REG are significant for all the three categories. This
suggest that for all bank size, high leverage bank which has a low EQTL will hold less
equity capital. The results also consistent with our main reference where the high
regulatory requirements may cause the low capitalised banks reduce their capital ratio.
The consistent results obtained from all three categories of banks further justify the
reason of bank size appears not a determinant of bank capital in East Asia region.
61
Table 12: Determinants of capital ratio according to Bank Size
The dependent variable is the risk-weighted capital adequacy ratio (CAR). The non dummy explanatory variables include six bank specific
variables (LLR, NIM, LASCF, SIZE, EQTL, and ROA). LLR refers to the loan loss reserves to gross loan ratios. NIM and LASCF are the net
interest margin and the ratio of total liquid assets to total deposits respectively. SIZE represents the natural logarithm of total assets. EQTL is the
ratio of total equity to total liabilities; ROA is the return on average assets. Total number of observations is 952. Reported in parentheses are
robust standard errors. * indicates significance at the 10% level, ** indicates significance at the 5% level, *** indicates significance at the 1%
level.
Variables CAR
Large Medium Small
Constant 4.5244 14.0378*** 13.4531
(1.0698) (2.6813) (-1.3274)
Bank Specific
LLR 0.0915 0.5047*** 0.1188
(0.9064) (4.0353) (-1.2663)
NIM 0.2328 -0.4369 -0.3550
(0.9148) (-1.2765) (-1.1333)
LASCF 0.0026 0.0416*** 0.0762***
(0.1755) (2.7594) (-2.8633)
SIZE 0.1360 -0.8766 -0.3295
(0.3569) (-1.5643) (-0.2617)
EQTL 0.7964*** 0.6447*** 0.4457***
(10.7545) (11.0942) (-6.3571)
ROA -0.1971 0.6104*** 0.6009*
(-1.7974) (3.0063) (-1.9155)
REG -2.2714*** -1.4699*** -5.2541***
(-5.1894) (-3.4973) (-3.7488)
SSE (Sum squared resid) 137.7592 527.0585 2278.7680
Adjusted R-square 0.9091 0.8644 0.9086
Durbin-Watson stat 1.7339 1.5504 2.2011
F-Statistic 36.3643*** 24.2530*** 36.1725***
Number of Observations 284 384 284
63
4.5.3 ROBUSTNESS CHECK – ANALYSIS BASED ON COUNTRY
Finally, we run the regression separately for each country. The final sample of study
consists of 238 banks, with 109 Japanese Banks, 26 Chinese Banks, 18 South Korean
independent variables and the dependent variables for each of the country.
The results are shown in Table 13 and only the impacts of bank-specific factors on the
capital adequacy ratio were examined. Next we discussed the significant of each
variable for the studied countries. LLR has significant relationship with capital ratio
for the samples in China and Malaysia. NIM is significant related to capital ratio for
the samples in Indonesia only. LASCF is positively related to capital ratio for the
samples in Japan, Malaysia and Thailand. SIZE is significant related to capital ratio
for the samples in Korea and Philippines only at 0.10 level. EQTL is significant
related to capital ratio for the samples in China, Malaysia, Philippines and Thailand.
The dependent variable is the risk-weighted capital adequacy ratio (CAR). The non dummy explanatory variables include six bank
specific variables (LLR, NIM, LASCF, SIZE, EQTL, and ROA). LLR refers to the loan loss reserves to gross loan ratios. NIM and
LASCF are the net interest margin and the ratio of total liquid assets to total deposits respectively. SIZE represents the natural logarithm
of total assets. EQTL is the ratio of total equity to total liabilities; ROA is the return on average assets. Total number of observations is
952. Reported in parentheses are robust standard errors. * indicates significance at the 10% level, ** indicates significance at the 5%
Variables CAR
China Japan Korea Indonesia Malaysia Philippines Thailand
Constant 5.7311 -6.4461 40.3942** 33.6156 -11.9019 53.6260* 14.7038
(0.3178) (-0.6938) (2.5941) (-1.6460) (-0.5763) (2.0298) (1.0152)
Bank Specific
LLR 0.9219** -0.0993 -0.2423 0.1875 -0.3070** 0.0978 -0.1928
(2.1604) (-1.3894) (-0.5113) (0.9665) (-2.0366) (0.6278) (-1.1482)
NIM 0.8124 0.5755 -0.2598 -0.8834** -0.5991 1.0896 0.3227
(1.0886) (1.1997) (-0.7940) (-2.3608) (-0.4268) (0.8754) (0.8430)
LASCF -0.0049 0.0330*** 0.0079 0.0699* 0.1268*** 0.0260 0.0735*
(-0.1121) (3.3810) (0.3924) (1.8483) (3.0631) (0.3631) (1.9964)
SIZE -0.7094 1.4899 -2.6658* -2.6726 2.8248 -6.3075* -1.7006
(-0.3937) (1.6221) (-1.9278) (-0.9808) (1.3343) (-1.9820) (-1.1726)
EQTL 1.3010*** 0.0545 0.0859 0.6240 0.2553*** 0.5950** 1.1502***
(13.8145) (0.8984) (1.3638) (4.5631) (2.7440) (2.3888) (9.1390)
ROA 0.2916 0.3621*** 0.6494* 0.6132*** 0.9665*** 2.3713* -0.5877
(0.3036) (5.8408) (1.8466) (1.0179) (2.8299) (1.8284) (-0.7981)
SSE (Sum squared
175.0560 113.0730 20.1591 813.6493 684.0576 259.3583 36.4334
resid)
Adjusted R-square 0.8861 0.8874 0.8324 0.9331 0.8835 0.7383 0.9053
Durbin-Watson stat 1.8832 2.1358 2.2692 2.2423 2.0467 2.4902 2.3488
F-Statistic 24.5594*** 30.2872*** 14.5645*** 45.2575*** 24.3720*** 7.8528*** 23.4748***
Number of
104 436 72 128 112 52 48
Observations
66
4.6 CHAPTER SUMMARY
This chapter first presents the descriptive statistics and the pair-wise correlation
to avoid variables redundancy. The VIF for all the independent variables is less than 5
LASCF, LLR, NIM, SIZE, ROA) and the dependent variable (CAR).
Firm fixed effect model is a better choice to run because Glesjer test reject the
We test the seven hypothesis and the statistical results reject hypothesis 1, 2, 3, 5, 6,
and 7. Hypothesis 4 which propose that bank size has no statistically significant
Before making conclusion of this study, we check the robustness of the results along
three more additional dimensions which separate the sample into first, Japanese banks
and non-Japanese banks; the size of the banks and the geographic location of the
banks. After omitting Japanese Banks the model still provides us similar results with
our baseline model. We can suggest that the model is a reliable model because the
result is not largely influence by the Japanese Banks even the sample in this study
The important result that can draw from the second robustness check is that the
similar results for each size category rationalise the insignificance of size factor in our
baseline model. Robustness checks according to countries do not provide us much
information about the model reliability because only few variables are significant in
each of the model. However, we can still notice the relationship between the
significance level are in the same direction of relationship with our baseline model.
68
CHAPTER 5: CONCLUSION AND RECOMMENDATION
This chapter presents an overview of the study and a summary of the major findings
as well as its interpretation of the major findings. Limitations of this study are also
stated in this chapter. Finally, recommendations for future research are also discussed.
The main objective of the study is to find the determinants of bank capital ratios in
East Asia in 2004-2007. The regression results shows that LLR, NIM, LASCF, EQTL,
ROA and REG are significantly influence the decision of determining the capital
The results of this study are consistent with the main reference, suggesting that the
banks in East Asia behave similarly. This is also further proved by the Wald test where
the country macro variables (real GDP growth and financial system) do not contribute
Although the major proportions of banks in our sample are taken from Japan, the
results are not differing after taking out Japanese Bank as shown in Table 11. The
robustness check ensures the research model is appropriate and reliable. Furthermore,
the second robustness checks on size categories consistent with the baseline model
where the size effect appears not a determinant of capital ratio in East Asia. The
regression result of each country is overall not much different with our baseline model
69
5.1 INTERPRETATION OF MAJOR FINIDNGS
The relationship between bank capital and risk taking is positive. This suggests with
increase in bank capital, the higher tendency of risk taking behaviour. We may
conclude that the capital decisions are related to banks’ risk taking behaviours
signalling banks voluntarily increase their capital in order to maintain their capital
buffer.
Management quality and banks profitability provides insights of banks with high
earnings may reduce the amount of excess capital. Leverage factor proxied by total
equity to total liabilities, shows a positive relationship because the risk premium for
high leverages bank is higher than the low leveraged banks. So in general low
leverage bank (high EQTL) may have a higher capital since they can issue new shares
easier compare to high leverage bank. The liquidity of the banks also shows positive
To examine the impact of the capital regulations pressure, a dummy variable REG is
included in the model. The negative sign of the coefficient REG indicates that low
As stated in Chapter 1, this study extends the regression model proposed by Ahmad.
R,, Ariff, & Michael, (2008) which completed in 2004. The significance of this
current study focuses on the subsequent period which is from 2004-2007, and
moreover the results are similar with same direction of relationship between the target
capital level and selected determinants. Furthermore, inclusive of additional six East
70
Asia countries, the relationships do not alter.
The study, however, has its limitations. First, the study only covers 4 years, the period
of 2004-2007. Since this study employs balanced panel data method, some of the
banks which do not have complete set of data during the studied period were dropped
out from the sample. For instance, Singapore is not included in the study due to
Second, this study also do not separate locally incorporated foreign banks and
domestic banks. Therefore, it is interesting to see whether foreign banks and domestic
banks share the same principals in setting their banks’ capital ratio.
Future studies may focus on the following criteria. First as mention in the limitation
section, the future may specify the type of banks and ownership structure of the banks
in order to investigate whether type and ownership structure influence the decision of
setting capital ratio. Second, future researchers may also interest to study the
71
5.5 CHAPTER SUMMARY
In conclusion, based on the regression results, credit risk, bank liquidity, bank
leverage and bank profitability show a significant positive impact on target capital
ratio. Management quality and regulatory pressure show a significant negative impact
on target capital ratio. All the sign of the coefficients of each independent variable is
The limitations of this study are basically the data availability and model estimation
without separating different type of banking institutions. Therefore, the future studies
may perhaps focus on investigate the determinants of capital ratio for different types
of banking institutions. Perhaps the effectiveness of capital regulation for East Asian
72
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APPENDICES
Effects Specification
Table 15: Bank Specific Variable only - Period Fixed and Country Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 04/16/09 Time: 01:17
Sample: 2004 2007
Cross-sections included: 238
Total panel (balanced) observations: 952
76
LASCF 0.029272 0.013502 2.168074 0.0304
SIZE -0.138298 0.082747 -1.671340 0.0950
EQTL 0.637936 0.028291 22.54933 0.0000
ROA 1.296084 0.203039 6.383436 0.0000
REG -2.941922 0.590864 -4.979014 0.0000
D1 2.418578 0.964762 2.506918 0.0123
D2 2.158586 0.942708 2.289773 0.0223
D3 1.628129 1.057190 1.540053 0.1239
D4 7.654563 0.901008 8.495555 0.0000
D5 3.102445 0.928294 3.342093 0.0009
D6 3.785390 0.869888 4.351584 0.0000
Effects Specification
Table 16: Bank Specific Variable only - Firm Fixed and Period Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 03/31/09 Time: 03:23
Sample: 2004 2007
Cross-sections included: 238
Total panel (balanced) observations: 952
Effects Specification
77
Sum squared resid 3162.287 Schwarz criterion 5.825048
Log likelihood -1922.261 F-statistic 43.77570
Durbin-Watson stat 2.050998 Prob(F-statistic) 0.000000
Effects Specification
Table 18: Bank Specific and Country Macro Variables - Country Fixed and Period
Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 04/16/09 Time: 01:34
Sample: 2004 2007
Cross-sections included: 238
Total panel (balanced) observations: 952
78
LLR 0.194247 0.046884 4.143108 0.0000
NIM -0.690112 0.132479 -5.209234 0.0000
LASCF 0.029659 0.013545 2.189659 0.0288
SIZE -0.141835 0.082949 -1.709906 0.0876
EQTL 0.637531 0.028320 22.51189 0.0000
ROA 1.292435 0.203210 6.360084 0.0000
REG -2.934625 0.592031 -4.956876 0.0000
RGDP 0.225554 0.278396 0.810190 0.4180
BANK 0.007316 0.038786 0.188616 0.8504
D1 1.203831 1.806743 0.666299 0.5054
D2 2.778989 1.307748 2.125018 0.0338
D3 1.860728 1.282839 1.450477 0.1473
D4 7.765472 0.920018 8.440570 0.0000
D5 2.763021 1.697683 1.627524 0.1040
D6 3.842869 0.918013 4.186075 0.0000
Effects Specification
Table 19: Bank Specific and Country Macro Variables - Firm Fixed and Period Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 03/31/09 Time: 03:24
Sample: 2004 2007
Cross-sections included: 238
Total panel (balanced) observations: 952
Effects Specification
79
Cross-section fixed (dummy variables)
Period fixed (dummy variables)
Effects Specification
Table 21: Robustness check (I), Bank Specific Variables only, Country Fixed and
Period Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 04/17/09 Time: 04:16
Sample: 2004 2007
Cross-sections included: 129
80
Total panel (balanced) observations: 516
Effects Specification
Table 22: Robustness check (I), Bank Specific Variables only, Firm Fixed and Period
Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 03/31/09 Time: 03:31
Sample: 2004 2007
Cross-sections included: 129
Total panel (balanced) observations: 516
Effects Specification
81
Cross-section fixed (dummy variables)
Period fixed (dummy variables)
Effects Specification
Table 24: Robustness check (I), Bank Specific Variables and Country Macro Variable,
Country Fixed and Period Fixed
Dependent Variable: CAR
Method: Panel Least Squares
82
Date: 04/17/09 Time: 04:18
Sample: 2004 2007
Cross-sections included: 129
Total panel (balanced) observations: 516
Effects Specification
Table 25: Robustness check (I), Bank Specific Variables and Country Macro Variable,
Firm Fixed and Period Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 03/31/09 Time: 03:32
Sample: 2004 2007
Cross-sections included: 129
Total panel (balanced) observations: 516
83
EQTL 0.477996 0.051433 9.293629 0.0000
ROA 0.452428 0.233289 1.939341 0.0532
REG -4.675334 1.081143 -4.324437 0.0000
RGDP 0.589282 0.219987 2.678712 0.0077
BANK 0.094382 0.043820 2.153879 0.0319
Effects Specification
Effects Specification
84
Table 27: Medium Bank
Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 01:36
Sample: 2004 2007
Cross-sections included: 96
Total panel (balanced) observations: 384
Effects Specification
85
Effects Specification
Effects Specification
86
Cross-sections included: 109
Total panel (balanced) observations: 436
Effects Specification
Effects Specification
87
S.E. of regression 0.669312 Akaike info criterion 2.314865
Sum squared resid 20.15906 Schwarz criterion 3.168614
Log likelihood -56.33513 F-statistic 14.56453
Durbin-Watson stat 2.269168 Prob(F-statistic) 0.000000
Effects Specification
88
SIZE 2.824817 2.117077 1.334300 0.1861
EQTL 0.255343 0.093056 2.743966 0.0076
ROA 0.966544 0.341545 2.829921 0.0060
Effects Specification
Effects Specification
89
Date: 05/10/09 Time: 02:58
Sample: 2004 2007
Cross-sections included: 12
Total panel (balanced) observations: 48
Effects Specification
90
Nanchang City Commercial Bank
Yinzhou Bank-Ningbo Yinzhou Rural Cooperative Bank
Rural Credit Cooperatives Union of Shunde
Shanghai Pudong Development Bank
Shenzhen Development Bank Co., Ltd
Tianjin City Commercial Bank
Xi'an City Commercial Bank
Yantai City Commercial Bank Co Ltd
91
Hokuyo Bank-North Pacific Bank
Howa Bank, Ltd
Hyakugo Bank Ltd.
Hyakujushi Bank Ltd.
Ibaraki Bank, LTD.
Iyo Bank Ltd
Joyo Bank Ltd.
Juroku Bank Ltd. (The)
Kabushiki Kaisha Mitsubishi UFJ Financial Group-Mitsubishi UFJ Financial Group
Inc
Kagawa Bank, Ltd.
Kagoshima Bank Ltd. (The)
Kanagawa Bank, Ltd.
Kansai Urban Banking Corporation
Kanto Tsukuba Bank Ltd
Keiyo Bank, Ltd. (The)
Kinki Osaka Bank Ltd (The)
Kita-Nippon Bank
Kiyo Bank
Kumamoto Family Bank, Ltd
Kyoto Chuo Shinkin Bank
Kyoto Shinkin Bank (The)
MIE Bank Ltd (The)
Minami-Nippon Bank, Ltd.
Minato Bank Ltd
Miyazaki Bank
Miyazaki Taiyo Bank, Ltd. (The)
Mizuho Bank
Mizuho Corporate Bank
Mizuho Financial Group
Momiji Bank
Musashino Bank
Nagano Bank Ltd.
Nanto Bank Ltd. (The)
Nishi-Nippon City Bank Ltd (The)
Ogaki Kyoritsu Bank
Oita Bank Ltd (The)
Okazaki Shinkin Bank (The)
Okinawa Kaiho Bank Ltd (The)
Resona Holdings, Inc
Saikyo Bank
San-In Godo Bank, Ltd
Sapporo Bank Ltd (The)
Sapporo Hokuyo Holdings, Inc
Sendai Bank, Ltd.
Senshu Bank Ltd. (The)
Seto Shinkin Bank (The)
Shiga Bank, Ltd (The)
92
Shikoku Bank Ltd. (The)
Shimane Bank Ltd
Shimizu Bank Ltd (The)
Shinwa Bank Ltd. (The)
Shizuoka Bank
Shonai Bank
Sumitomo Mitsui Financial Group, Inc
Suruga Bank, Ltd. (The)
Taiko Bank Ltd
Tajima Bank Ltd (The)
Tochigi Bank, Ltd.
Toho Bank Ltd. (The)
Tohoku Bank
Tokushima Bank
Tokyo Star Bank Ltd.
Tokyo Tomin Bank, Ltd. (The)
Tomato Bank, Ltd
Tottori Bank
Towa Bank
Toyama Bank, Ltd, (The)
Yachiyo Bank
Yamagata Bank Ltd.
Yamaguchi Bank
Yamanashi Chuo Bank Ltd (The)
93
Bank Bumi Arta
Bank Bumiputera Indonesia
Bank Central Asia
Bank Chinatrust Indonesia
Bank Commonwealth
Bank Danamon Indonesia Tbk
Bank DBS Indonesia
Bank Ekonomi Rahardja
Bank Haga
Bank Internasional Indonesia Tbk
Bank Jabar PT
Bank Lippo Tbk.
Bank Mandiri (Persero) Tbk
Bank Mega TBK
Bank Negara Indonesia (Persero) - Bank BNI
Bank Nusantara Parahyangan
Bank OCBC NISP Tbk
Panin Bank-Bank Pan Indonesia Tbk PT
Bank Permata Tbk
Bank Rabobank International Indonesia
Bank Sumitomo Mitsui Indonesia
Bank Swadesi
Bank Tabungan Negara (Persero)
Bank Tabungan Pensiunan Nasional PT
Bank UOB Buana
Bank Woori Indonesia
Hongkong and Shanghai Banking Corporation Limited (The)
PT Bank CIMB Niaga Tbk
PT Bank Mizuho Indonesia
PT Bank Muamalat Indonesia Tbk
94
EON Bank Berhad
Hong Leong Bank Berhad
HSBC Bank Malaysia Berhad
Malayan Banking Berhad - Maybank
Maybank Investment Bank Berhad
OCBC Bank (Malaysia) Berhad
Public Bank Berhad
RHB Bank Berhad
RHB Investment Bank Bhd
Royal Bank of Scotland Berhad (The)
Standard Chartered Bank Malaysia Berhad
United Overseas Bank (Malaysia) Bhd.
95