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The Determinants of Bank Capital Ratios in a Developing Economy

Author

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  • Rubi Ahmad

    ()

  • M. Ariff

    ()

  • Michael Skully

    ()

Abstract

This paper reports new findings on the determinants of bank capital ratios. The results are from an unbalanced panel data set spanning eight years around the period of the 1997-1998 Asian financial crisis. Test results suggest a strong positive link between regulatory capital and bank management?s risk-taking behaviour. The risk-based capital standards of the regulators did not have an influence on how regulatory capital is adjusted by low-capitalized banks, perhaps due to the well-documented banking fragility during the test period. Finally, bank capital decisions seem not to be driven by bank profitability, which finding is inconsistent with developed country literature that has for long stressed the importance of banks? earnings as driving capital ratios. Although the study focuses only on one developing economy, these findings may help to identify the correlates of bank capital ratios in both developed and developing economies since this topic has received scant attention of researchers. These findings are somewhat consistent with how banks engaging in risky lending across the world could have brought on the 2007-2008 banking liquidity and capital erosion crisis.
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Suggested Citation

  • Rubi Ahmad & M. Ariff & Michael Skully, 2008. "The Determinants of Bank Capital Ratios in a Developing Economy," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 15(3), pages 255-272, December.
  • Handle: RePEc:kap:apfinm:v:15:y:2008:i:3:p:255-272
    DOI: 10.1007/s10690-009-9081-9
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    Cited by:

    1. Awojobi, Omotola & Amel, Roya & Norouzi, Safoura, 2011. "Analysing Risk Management in Banks: Evidence of Bank Efficiency and Macroeconomic Impact," MPRA Paper 33590, University Library of Munich, Germany, revised 17 Jul 2011.
    2. Klepczarek Emilia, 2015. "Determinants Of European Banks' Capital Adequacy / Determinanty Adekwatności Kapitałowej Banków Europejskich," Comparative Economic Research, De Gruyter Open, vol. 18(4), pages 81-98, December.
    3. repec:eee:revfin:v:34:y:2017:i:c:p:1-9 is not listed on IDEAS
    4. Ghosh, Saibal, 2010. "Credit Growth, Bank Soundness and Financial Fragility: Evidence from Indian Banking Sector," MPRA Paper 24715, University Library of Munich, Germany.
    5. Suryasnia, Sofi & Primiana, Ina & Sucherly, Sucherly & Herwany, Aldrin, 2016. "Banking Strategy and Implementation of Banking ASEAN Integration Framework(ABIF)in ASEAN Community (AEC)'s Era 2020 ERA 2020," MPRA Paper 73303, University Library of Munich, Germany, revised 25 Aug 2016.
    6. repec:spt:apfiba:v:8:y:2018:i:2:f:8_2_1 is not listed on IDEAS
    7. Talla M Aldeehani, 2016. "Has the risk index of Islamic banks and conventional banks in GCC countries changed in response to the 2008 economic crisis?," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(4), pages 20-33, August.
    8. Basher, Syed Abul & Kessler, Lawrence M. & Munkin, Murat K., 2017. "Bank capital and portfolio risk among Islamic banks," Review of Financial Economics, Elsevier, vol. 34(C), pages 1-9.
    9. repec:wsi:ijfexx:v:04:y:2017:i:02n03:n:s242478631750027x is not listed on IDEAS
    10. Odunayo Magret Olarewaju & Joseph Olorunfemi Akande, 2016. "An Empirical Analysis of Capital Adequacy Determinants in Nigerian Banking Sector," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(12), pages 132-142, December.

    More about this item

    Keywords

    Bank risk; Capital ratios; Financial crisis and capital; Risk-based capital; Risk index; Capital and earnings; G21; G28;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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