Diversification, corporate governance, regulation and bank risk-taking

Abstract

Purpose The purpose of this paper is to investigate the impact of diversification, corporate governance and capital regulations on bank risk-taking in Asian emerging economies. Design/methodology/approach The authors applied the generalized method of moments to analyze a sample of 116 listed banks of ten Asian emerging economies for the years 2010–2018. Findings The authors found that diversification, board size, CEO duality and board independence, block holders and capital regulations significantly affect bank risk-taking. In particular, nontraditional income sources such as noninterest income and adoption of diversification strategies minimize bank risk-taking. Practical implications It is expected that the outcomes of this study can be used by banks in Asian emerging economies that seek to reduce risk-taking by managing the diversification of their income streams and managing the impacts of capital regulation and implementing sound corporate governance features in monitoring their operations. This study suggests practical risk minimizing strategies for banks. First is the sourcing of nontraditional income and adoption of diversification strategies. Second, maintaining nonexecutive directors on the board would enhance monitoring of business activities. Third, maintaining deposit insurance would reduce bank’s risk. Government provides insurance to depositors to motivate them to deposit their funds into the banks. This, in return, facilitates banks to overcome risk. However, banks need to be cautious of any increase in capital ratio, as channeling funds into risky investments would increase risk. Originality/value This study is the first to investigate the impacts of corporate governance, diversification and regulation on bank’s risk-taking in a cross-country setting of ten Asian emerging economies.

Impact of income diversification on bank stability: a cross-country analysis

“…Similarly, Yakubu and Bunyaminu (2021) for Sub-Saharan and Hunjra et al (2020) for Asian indicate a negative relationship between bank capital and risk-taking. Moreover, according to Dias (2021), the link between capital requirements and banks' risk has an asymmetric pattern.…”

“…Appendix 1 is available online at: https://docs.google.com/document/d/1QisDpEcP302E zG58CybVlHp0fjubApMz/edit 3.2 Variable description and expected sign 3.2.1 Stability measures. The Z-score is an indicator of a banking institution's financial soundness, calculated as the summation of return on assets (ROA) and capital to asset ratios, then divided by the standard deviation of ROA (Hunjra et al, 2020). A higher Z-score indicates less risk.…”

“…Traditional banking inside a dynamic economic climate entails vulnerability to the volatility of interest rate, credit and bankruptcy risk, and bankers are no longer entirely reliant upon its conventional source of interest returns (Nisar et al, 2018;Paltrinieri et al, 2021). Significant financial organisation failures during a banking crisis have indeed been thought to have contributed to expanded vulnerability and the evolution of banking facilities into nonbanking financial operations (Hunjra et al, 2020). Since deregulation, banks have been allowed to mitigate the impact of deteriorating overall credit conditions by switching away from existing financial intermediation toward nontraditional income streams, including charges, commission and investment securities generating higher margins (Paltrinieri et al, 2021).…”

Dynamics of diversification and banks' risk‐taking and stability: Empirical analysis of commercial banks

“…While studying the sample of GCC banks, Abuzayed et al (2018) argued that the impact of diversification on banks' stability varies with macroeconomic conditions. Existing literature demonstrates that the GFC has increased the importance of financial institutions' risk‐taking and stability (Hunjra et al, 2020). In a similar context, DeYoung and Torna (2013) opine that banks' excessive involvement in non‐core activities during the GFC is one reason for a larger bank's failure.…”

Determinant of Bank Risk with Bank Scale as Moderating Variable in ASEAN

“…Capital regulation presents a minimum Capital Adequacy Ratio which is an important consideration in analyzing bank risk-taking. Large Capital Adequacy Ratio (CAR) will raise bank stability by improving the bank's ability to absorb and bear risks (Hunjra, Hanif, Mehmood, & Nguyen, 2020). Van Roy (2008) argues that CAR's strict policy encourages banks to compensate for losses with optimal risk-raising options.…”