Causal Relationship Among Bank Capitalization, Efficiency, and Risk-Taking in ASEAN Commercial Banks

Abstract

Purpose – This chapter explores the answer to the question of whether bank capital is sufficient to absorb risk while maintaining efficiency in ASEAN countries, a new emerging part of the globalized banking system. Design/methodology – This chapter focuses on three objectives: first, to investigate the contemporaneous interactions of capital, risk, efficiency; second, to determine directional Granger causality of the relationship; third, to adopt a new panel vector autoregression to track the explanatory power of causation through the impulse-response functions and variance decompositions. Results – This chapter contributes to literature through providing evidence on the causality of bank capital on cost efficiency and bidirectional causal interactions of bank capital and risk. Better capitalization induces the improvement in efficiency in ASEAN commercial banks even with different ownership, size, and across pre- and postcrisis period. Contribution – This chapter is perhaps the only study so far to investigate the dynamic causality among capital, risk, and efficiency taking into account the sensitivity of the interactions to influential factors of ownership, size, and crisis in ASEAN region—an emerging player in the global banking system.