Risk Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia using Dynamic OLS and Two-step Dynamic System GMM Estimators
The financial and banking crises around the world have prompted the regulators to revise, among others, the capital level of the banks to deal with the excessive risks taken by the banks, both conventional and Islamic. This study is the first attempt to investigate the relationship between risky assets and capital level in a mixed banking system applying the panel VECM and dynamic GMM estimators. The Malaysian mixed banking system is used as a case study taking panel data covering the period from December 2006 to October 2013. Our statistical results based on dynamic OLS (DOLS) tend to indicate that there is a positive relationship between the capital ratio (CAR) and risk weighted asset ratio (RWA) in the long run and also, the causality analysis based on panel VECM and two-step dynamic System GMM tends to indicate unidirectional causality in that the RWA is positively driven by CAR. Our results appear to suggest that higher capital buffer (excess capital above regulatory capital requirement) might have opened up more space for bank managers to taking risky positions while assisted by increasing domestic demand for credit facilities under favorable economic condition of Malaysia. In other words, high capital growth and capital buffer provides an extra cushion for Malaysian banks to pursue relatively riskier financing activities. For the full-fledge Islamic banks (IB) and Islamic bank subsidiaries (IBS), the existence of a cointegrating relationship between RWA and CAR suggests that the way the managers of Islamic banks behave towards risky assets follows the conventional practice.
|Date of creation:||29 Jun 2014|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arellano, Manuel & Bover, Olympia, 1995.
"Another look at the instrumental variable estimation of error-components models,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 29-51, July.
- M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
- Francis, William B. & Osborne, Matthew, 2012. "Capital requirements and bank behavior in the UK: Are there lessons for international capital standards?," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 803-816.
- Allen N. Berger & Gregory F. Udell, 1993. "Did risk-based capital allocate bank credit and cause a credit crunch in the U.S.?," Finance and Economics Discussion Series 93-41, Board of Governors of the Federal Reserve System (U.S.).
- Allen Berger & Gregory Udell, 1994. "Did Risk-Based Capital Allocate Bank Credit and Cause a `Credit Crunch' in the U.S.?," Center for Financial Institutions Working Papers 94-07, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Jokipii, Terhi & Milne, Alistair, 2011. "Bank capital buffer and risk adjustment decisions," Journal of Financial Stability, Elsevier, vol. 7(3), pages 165-178, August.
- Terhi Jokipii & Alistair Milne, 2009. "Bank Capital Buffer and Risk Adjustment Decisions," Working Papers 2009-09, Swiss National Bank.
- Delis, Manthos D. & Kouretas, Georgios P., 2011. "Interest rates and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 840-855, April.
- Delis, Manthos D & Kouretas, Georgios, 2010. "Interest rates and bank risk-taking," MPRA Paper 20132, University Library of Munich, Germany.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- R Blundell & Steven Bond, "undated". "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- Richard Blundell & Stephen Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- Rime, Bertrand, 2001. "Capital requirements and bank behaviour: Empirical evidence for Switzerland," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 789-805, April.
- Konishi, Masaru & Yasuda, Yukihiro, 2004. "Factors affecting bank risk taking: Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 215-232, January.
- Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
- Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
- Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
- Tom Doan, "undated". "PANELFM: RATS procedure to perform panel data group mean FMOLS," Statistical Software Components RTS00151, Boston College Department of Economics.
- Shrieves, Ronald E. & Dahl, Drew, 1992. "The relationship between risk and capital in commercial banks," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 439-457, April.
- Rolf Larsson & Johan Lyhagen & Mickael Lothgren, 2001. "Likelihood-based cointegration tests in heterogeneous panels," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 1-41.
- Larsson, Rolf & Lyhagen, Johan & Löthgren, Mickael, 1998. "Likelihood-Based Cointegration Tests in Heterogeneous Panels," SSE/EFI Working Paper Series in Economics and Finance 250, Stockholm School of Economics, revised 27 Aug 1998.
- Blum, Jurg, 1999. "Do capital adequacy requirements reduce risks in banking?," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 755-771, May.
- Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-670, Special I.
- Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
- Masih, Rumi & Masih, Abul M. M., 1996. "Stock-Watson dynamic OLS (DOLS) and error-correction modelling approaches to estimating long- and short-run elasticities in a demand function: new evidence and methodological implications from an appl," Energy Economics, Elsevier, vol. 18(4), pages 315-334, October.
- Lee, Chien-Chiang & Hsieh, Meng-Fen, 2013. "The impact of bank capital on profitability and risk in Asian banking," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 251-281.
- Abdul Karim, Mastura & Hassan, M. Kabir & Hassan, Taufiq & Mohamad, Shamsher, 2014. "Capital adequacy and lending and deposit behaviors of conventional and Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 58-75.
- Jacques, Kevin & Nigro, Peter, 1997. "Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach," Journal of Economics and Business, Elsevier, vol. 49(6), pages 533-547.
- VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
- Jeitschko, Thomas D. & Jeung, Shin Dong, 2005. "Incentives for risk-taking in banking - A unified approach," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 759-777, March.
- Berger, Allen N & Udell, Gregory F, 1994. "Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 585-628, August.
- Allen N. Berger & Gregory F. Udell, 1994. "Did risk-based capital allocate bank credit and cause a "credit crunch" in the United States?," Proceedings, Federal Reserve Bank of Cleveland, pages 585-633.
- Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, "undated". "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:56975. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.