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The Determinants of Bank Capital Ratio in

East Asia

Thiam Chiann Wen


Bachelor of Science (Financial Mathematics)
University Malaysia Terengganu
2007

Submitted to the Graduates School of Business


Faculty of Business and Accountancy
University of Malaya, in partial fulfillment
of the requirement for the Degree of
Master of Business Administration

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

capital ratio in East Asia region.

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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

kindness displayed by her

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

sacrifices are indescribable.

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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

TABLE 1: VARIABLES AND PREDICTED SIGNS .............................................................. 35


TABLE 2: POOLED-SAMPLE DESCRIPTIVE STATISTIC OF THE SELECTED DEPENDENT AND
EXPLANATORY NON-DUMMY VARIABLES ............................................................. 40
TABLE 3: THE PAIRWISE CORRELATION MATRIX FOR DEPENDENT VARIABLES AND
EXPLANATORY NON DUMMY VARIABLES ............................................................. 41
TABLE 4: MULTICOLLINEARITY TEST ........................................................................ 43
TABLE 5: TEST FOR EQUALITY OF MEANS BETWEEN SERIES ...................................... 43
TABLE 6: LAGRANGE MULTIPLIER TESTS – GLESJER TEST.......................................... 45
TABLE 7: DETERMINANTS OF CAPITAL RATIO.............................................................. 47
TABLE 8: WALD TEST FOR BANK SPECIFIC VARIABLES ................................................. 49
TABLE 9: WALD TEST FOR COUNTRY BINARY VARIABLE .............................................. 50
TABLE 10: WALD TEST ON COUNTRY MACROECONOMIC VARIABLES ............................ 52
TABLE 11: DETERMINANTS OF CAPITAL RATIO (ROBUSTNESS CHECK, WITHOUT
JAPANESE BANKS) ............................................................................................. 58
TABLE 12: DETERMINANTS OF CAPITAL RATIO ACCORDING TO BANK SIZE ................... 62
TABLE 13: DETERMINANTS OF CAPITAL RATIO ACCORDING TO COUNTRY ..................... 65
TABLE 14: BANK SPECIFIC VARIABLE ONLY - PERIOD FIXED ....................................... 76
TABLE 15: BANK SPECIFIC VARIABLE ONLY - PERIOD FIXED AND COUNTRY FIXED ..... 76
TABLE 16: BANK SPECIFIC VARIABLE ONLY - FIRM FIXED AND PERIOD FIXED............. 77
TABLE 17: BANK SPECIFIC AND COUNTRY MACRO VARIABLES - PERIOD FIXED ......... 78
TABLE 18: BANK SPECIFIC AND COUNTRY MACRO VARIABLES - COUNTRY FIXED AND
PERIOD FIXED.................................................................................................... 78
TABLE 19: BANK SPECIFIC AND COUNTRY MACRO VARIABLES - FIRM FIXED AND
PERIOD FIXED.................................................................................................... 79
TABLE 20: ROBUSTNESS CHECK (I), BANK SPECIFIC VARIABLES ONLY, PERIOD FIXED 80
TABLE 21: ROBUSTNESS CHECK (I), BANK SPECIFIC VARIABLES ONLY, COUNTRY FIXED
AND PERIOD FIXED ............................................................................................ 80
TABLE 22: ROBUSTNESS CHECK (I), BANK SPECIFIC VARIABLES ONLY, FIRM FIXED AND
PERIOD FIXED.................................................................................................... 81
TABLE 23: ROBUSTNESS CHECK (I), BANK SPECIFIC VARIABLES AND COUNTRY MACRO
VARIABLE, PERIOD FIXED .................................................................................. 82
TABLE 24: ROBUSTNESS CHECK (I), BANK SPECIFIC VARIABLES AND COUNTRY MACRO
VARIABLE, COUNTRY FIXED AND PERIOD FIXED ................................................ 82
TABLE 25: ROBUSTNESS CHECK (I), BANK SPECIFIC VARIABLES AND COUNTRY MACRO
VARIABLE, FIRM FIXED AND PERIOD FIXED ........................................................ 83
TABLE 26: LARGE BANK ........................................................................................... 84
TABLE 27: MEDIUM BANK ........................................................................................ 85
TABLE 28: SMALL BANK ........................................................................................... 85
TABLE 29: REGRESSION RESULTS, CHINA .................................................................. 86
TABLE 30: REGRESSION RESULTS, JAPAN .................................................................. 86
TABLE 31: REGRESSION RESULTS, KOREA ................................................................. 87
TABLE 32: REGRESSION RESULTS, INDONESIA ........................................................... 88
TABLE 33: REGRESSION RESULTS, MALAYSIA ........................................................... 88
TABLE 34: REGRESSION RESULTS, PHILIPPINES.......................................................... 89
TABLE 35: REGRESSION RESULTS, THAILAND ............................................................ 89
TABLE 36: SAMPLE BANKS OF CHINA ........................................................................ 90

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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

1.0 STATEMENT OF THE PROBLEM

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

are heterogeneous across the region.

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

whether regulatory constraints do have an impact on banks' behaviours.

In the light of aforesaid discussion, the present paper seek to address the following

issues, first to investigate whether the higher capital requirements introduced by

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

some about the effectiveness of a regulatory framework of these countries’ banking

system operation. The countries in South East Asia adopted the Basel Committee on

Banking Supervision (BCBS) standard of 8 per cent risk-weighted capital adequacy

ratio (CAR), which the adoption date of the eight Asian countries are as follow,

Malaysia in 1989, Japan in 1989, Singapore in 1992, Indonesia in 1993, Korea in

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

desired response from bank management.

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

(Shrieves and Dahl,1992).

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

earnings to protect against liquidation.

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

strong empirical evidence of the self-disciplining power of charter value in U.S

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.

Therefore, it is interesting to see how the management of banks in developing

countries for instance South East Asian countries behave.

1.1 CAPITAL ADEQUACY FRAMEWORK

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

international organisation formed in 1930 to promote international monetary and

financial co-operation and to serve as a bank for central banks around the world.

The guidelines were intended to 1) establish a systematic analytical framework that

make regulatory capital requirements more responsive to differences in risk profiles

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

implementation of the capital adequacy framework in the sample countries.

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

pillars, among which bank restructuring, financial liberalization and strengthened

financial regulation and supervision. (Garcia-Herrero et al. 2006).

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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

regulation on “Asset Liability Ratios Management of Commercial Banks,

Measurement, Controlling, Monitoring and Evaluation”. Effectively from 1997, PBC

states that, it is mandatory for the commercial banks to have a minimum risk weighted

capital adequacy ratio of 8%.

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

capital. (Brana & Lahet, 2009)

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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

authorities. An independent Agency, the Supervisory Agency for Financial Entities

became in charge of bank supervision, instead of the Japanese Ministry of Finance.

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.

In 1997, private-sector financial institutions showed greater willingness to reduce

risky assets as capital constraints were intensified (BIS, 1998).

KOREA

In 1981, the Office of Bank Supervision in Korea first introduced capital adequacy

requirements by setting numerical capital-to-deposit guidelines at 10 per cent for all

banks. However, in 1988 the guideline was changed from the capital-to-deposit ratio

to the capital-to-total asset ratio in order to control the increases of financial

leveraging by banks. Corresponding to the ongoing financial liberalization, the

minimum required capital ratio was at 6 per cent for nationwide city banks and 8 per

cent for the regional banks.

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

capital standards suggested by the Basel Committee as an additional measure to

ensure capital adequacy.

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

weighted capital adequacy requirement. For example, the minimum paid-in-capital

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

amount of equity capital equivalent to at least one twentieth of its outstanding

liabilities arising from guarantees or other contingent liabilities, as a prescribed

solvency position under the provisions of the General Banking Act.

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 required by a banking institution to operate as a going concern entity. The

capital adequacy framework can be divided into three broad categories which consist

of the general capital adequacy requirements, components of eligible regulatory

capital and the Risk-Weighted Assets (RWA). Banking institutions incorporated in

Malaysia are required to maintain a minimum Risk-Weighted Capital Ratio (RWCR)

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

recommendation of Basel Committee in 1996. In 1999, Bank Negara decides to raise

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

the end of 2001.

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

implemented by 2010; implementation of the IRB Approach is completed for banks

8
that choose this approach. Banks on the Standardised Approach are not mandated to

migrate to the IRB Approach.

INDONESIA

Banking supervisory in Indonesia was coordinated under Master Dokumen

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

liberalisation, capital requirements which represent the main banking supervisory

instrument in Indonesia was initiated as part of Policy Package of October 1988

(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

requirements. Because of the financial crisis in 1997, Bank Indonesia adopts a

regulatory relief or tolerance of CAR from 8 percent to 4 percent, notionally to

provide a breathing space for the banks and their borrowers. However, the CAR is

restored again to 8 percent in 2001.

Indonesian Banks would get administrative approval or forced into the

recapitalization program if fail to meet the regulatory requirements. Therefore, as in

September 1998, the banking recapitalisation program was conducted by Indonesian

Bank Restructuring Agency (IBRA), under the Ministry of Finance. In classifying

9
which banks to go for the recapitalisation program, IBRA proposed three groups

based on an audit by international accounting firms. Although Indonesian banks

appeared to have a lower capital regulation, the situation post crisis pushed the

regulator to strengthen the capital requirement rules.

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

capital was also raised to 6 per cent.

Therefore, BOT ensures every process of banking supervision such as licensing;

issuance of prudential regulations; regular risk examination; timely resolution of

problem banks; domestic and foreign supervisory coordination is conducted with

transparency and professionalism. In addition, to increase the efficiency and

effectiveness of financial institutions supervision, the BOT also considers other

relevant international standards and encourages the growth of essential financial

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),

applicable to all financial institutions in 2009. Therefore, domestic banks will be

required to be ready for Basel II compliance testing and implementation by end of

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

complexity the financial market environments.

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

matching the 1996 Amendments to Basel I. The calculation of qualifying capital 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

Standards by 2005, and adoption of the Basel II Capital Adequacy Framework by

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

11
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.

1.3 OBJECTIVES OF THE STUDY

There are total four objectives for this study.

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

remaining three countries are Japan, China and South Korea.

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

effectiveness of international regulatory standards.

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

regulatory capital level.

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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

capital requirements determined by the regulators influence the capital decision of

banks.

1.4 SCOPE OF THE STUDY

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

This study is organized into five chapters.

Chapter 1 introduces the Capital Adequacy Framework (Basel I), suggesting by the

Bank for International Settlements (BIS), followed by regulations of capital adequacy

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.

Chapter 2 describes the literature review on the banks capital determination,

relationship between banks risk and capital, surveying previous researched conducted

in this area.

Chapter 3 presents conceptual background, source of data, research instruments, panel

regression model, and statistical analysis method.

Chapter 4 provides results of the study, which includes analysis and explanations of

the major research findings

Chapter 5 summarizes the conclusion, contribution of study, limitation and

recommendations for future research.

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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

considerable empirical evidence in several developments countries provide some

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.

2.0 EARLY RESEARCH

Effects of capital adequacy regulations on banks’ behaviour have been actively

analysed before. The earliest research on capital adequacy can trace back to 1977.

Kahane first examines the effectiveness of capital adequacy and the regulations

imposing to the financial intermediaries. In the theory literature, Koehn and

Santomero (1980) and Kim and Santomero (1988), using a mean-variance framework,

show that increased regulatory capital standards may lead banks to choose risky

portfolios to cover the loss in utility from the decrease in leverage.

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

effectiveness of capital adequacy requirements is also mixed.

2.1 DEFINATION AND ROLE OF BANK CAPITAL

Banks play an important role in the global economy, and are the first category of

institutions to be subject to internationally coordinated capital regulation. The failure

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

a global recession as what is happening in 2008.

The typical textbook explained that there is no need to investigate banks’ financing

decisions because capital regulation determined the capital structure of a financial

institution which is different from the non-financial firms.

“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

amount of bank capital is determined by the bank capital requirements (Mishkin,

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

and asymmetric information are among the frictions consideration.

2.2 BANK CAPITAL MANAGEMENT

In the earlier section, we identify the reasons of banks hold capital and the role capital

of financial institution. The existing literature on bank capital management is based

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

expected losses from violating capital requirements.

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

17
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

regulations imposing in 1990.

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

between regulatory capital and loan loss provisions.

2.2 BANK CAPITAL AND BANK BEHAVIOURS

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

(Marcus 1984, Milne and Whalley 2002).

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

18
risky asset portfolio at the cost of the deposit insurance system. Therefore, their

finding has been interpreted as supporting the moral hazard theory.

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

bank holds in excess of the regulatory minimum (the capital buffer).

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,

capital will be negatively related to risk adjustments.

19
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

commercial banks and investment banks. Their framework is again building on

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

the target capital ratio.

2.4.1 THE PRESENCE OF GOVERNMENT GUARANTEES

Capital injection and bailed out by the government helps bank to lessen the risky

loans at the margin (Kentaro, 2007). However in the presence of Government

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

rates. Government guarantees provide incentives to the banks’ management to take

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).

20
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

impose on the capital decision without and with capital regulation.

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

institutional environment is weak. The impact of deposit insurance further explain by

Hovakimian et al (2003) who investigate thoroughly on how well authorities in 56

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

it is difficult to implement suitable restraints.

2.4.2 THE EFFECTS OF CAPITAL REGULATIONS

Edizt, Micheal and Perraudin (1998) assess the effect of the Basel Capital Accord

adequacy requirement on capital ratios of UK banks. By using confidential

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.

21
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

adjustment in undercapitalized banks.

Similarly Rime (2001) examines the Swiss banks’ capital and risk behaviour. The

author adopts a simultaneous equations approach to examine whether Swiss banks

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.

However, there is no evidence of capital requirement has significant impact on the

banks’ risk taking behaviour.

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.

2.4.3 SHAREHOLDERS AND MANAGERS’ RISK AVERSION

The ownership structure may also affect the target capital level. Saunders, Strock and

Travlos (1990) concentrate on the risk taking behaviours of both stockholder

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

stockholders controlled banks.

Apart from this, Ronald C. Anderson and Donald R. Fraser (2000) present evidence

that managerial shareholdings are an important determinant of bank risk-taking.

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

suggest bank risk is negatively correlated with capitalization if the shareholders’

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

whenever managerial incentives are dominating factors in determining asset risk.

2.4.4 BANK EARNINGS OR CHARTER VALUE

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

give the banks’ management additional incentive to avoid excessively involved in

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

weighted capital adequacy requirements implemented in 1993. The author concludes

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

to assets substitution across the risk-weight categories by substitute low risk

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

implementation are required to prevent those banks from gambling in excessively

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

capital ratios in Malaysia. This study presents a positive relationship between

regulatory capital and banks’ risk taking behaviour. The study also observes that

capital requirement regulations introduced in 1996 was ineffective whereas those

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

capital ratios not to been motivated by bank profitability.

26
2.6 CHAPTER SUMMARY

This chapter begins with reviewing the early research on capital adequacy started in

1977 by Kahane who investigate the effectiveness of capital adequacy regulations

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

banks, whether adequately capitalized or not, engaged in riskier activities. The

determinants of bank capital are discussed in four subsections which are the presence

of government guarantees, the effects of capital regulations, shareholders and

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

are remain ambiguous.

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

discussed in the later section of this chapter.

3.0 RESEARCH HYPOTHESES

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

the mathematical representations are also presented:

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

3.1 RESEARCH METHODOLOGY

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

bank specific variables as well as variable that measures regulatory pressure.

Thus, the panel regression model is written as:

Y i, t = β0 + β1 LLR i, t + β2NIM i, t + β3 LACSF i, t + β4

SIZE i, t + β5 EQTL i, t + β6 ROA + β7 REG i, t

+ ε i, t (1)

where:

Yi, t : capital ratio of bank i at time t,

LLR i, t: ratio of Loan Loss Reserves to gross loans of bank i at time t,

NIM i, t : net interest margin of bank i at time t,

SIZE i, t: natural log of total assets of bank i at time t, and

EQTL i, t: ratio of total equity to total liabilities of bank i at time t,

LACSF i, t : ratio of total liquid asset to total deposit of bank i at time t,

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.

Β1 –β7: parameters to be estimated

The following section discusses each of these variables and their expected impact on

bank capital as proposed in the literature

3.2 DEPENDENT VARIABLE – CAPITAL ADEQUACY RATIO (CAR)

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

requirement’. The total capital requirement requires a total risk-weighted 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).

CAR is calculated according to the 1988 Basel Accord, presented as below:

Tier1capital  Tier 2capital


CAR(%)   100 (2)
TotalRiskWeightedAssets

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

kept in 5 weights (0%, 10%, 20%, 50% and 100%).

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

are referred to previous developed country bank studies.

Back Specific Variables:

Bank risk taking – Loan Loss Reserve

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

amount thought to be adequate to cover estimated losses in the loan portfolio. We

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

capital to a greater extent in order to overcome their bad financial situation.

Management quality – net interest margin

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

value which discussed in introduction predicts a positive relationship between bank

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

can also have a negative sign.

Bank Size - SIZE

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

asset-size is an important determinant of its capital ratio in an inverse direction, which

means that larger banks have lower CARs. This may occur because firm size might

serve as a proxy for a banking organization’s asset diversifications which reduces

their risk exposure. So, the coefficient of SIZE can have either a positive or negative

sign.

Bank Liquidity – LACSF

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

equivalents increases, a bank's liquidity risk declines, leading to lower liquidity

premium in the net interest margins. Therefore, an increase in bank liquidity (high

LACSF) may have a positive impact to capital ratio.

Bank Leverage – EQTL

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

coefficient of EQTL is positive.

Bank Profitability – ROA

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

profits with an expected positive sign.

Regulatory Policy Factors:

Regulatory Pressure – REG

Capital requirements create pressure on undercapitalized banks to maintain higher

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.

Country Macro Variables: - RGDP, BASE

A country’s growth and the extent to which its financial system is bank based are

important determinants of the capital structure of banking organizations. Economic

34
cycles may influence the level of CAR, as capital holdings may change over time to

accommodate fluctuations in risk arising from variations in the economic environment.

In an economic downturn, the possibilities of a fall in capital increases as a result of

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

banks would hold higher CARs than during an upturn.

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

the bank capital ratio also presented.

Table 1: Variables and predicted signs


Variables Predicted Signs
Loan Loss Reserve (LLR) +/-
Net Interest Margin (NIM) +/-
Bank Size (SIZE) +/-
Liquid Asset to Customer and Short Term Funding (LACSF) +
Total Equity to Total Liabilities (EQTL) +
Return on Asset +

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

with T = 1, or time series data which is a panel with N = 1, hence improving he

efficiency of econometric estimates.

Second, they allow a researcher to analyse several important economic questions that

cannot be attended using cross-sectional or time-series data sets alone. A

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

available to utilize the individual differences in explanatory variables in order to

reduce the problem of multicollinearity.

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

taken to provide a standard measure of the figures and ratio.

In expanding the previous study which used Malaysian banks sample, this study adds

three neighbouring countries of Malaysia which are Thailand, Indonesia and

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.

Therefore, samples are subject to subscription to the database. Unfortunately there is

only one Singaporean bank which has complete data in the database so we have no

choice to omit Singapore in this study.

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

adopt Basel II gradually.

37
The banks were screened in two ways. First, we must ensure that each bank have

complete four years of data relating to variables to be used in regression. To be exact,

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

Banks, 18 South Korean Banks, 32 Indonesian Banks, 28 Malaysian Banks, 13

Philippines Banks and 12 Thailand Banks.

3.6 STASTICAL ESTIMATION AND INFERENCE

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

mainly in data analysis. EViews is useful in providing powerful statistical, forecasting,

and modeling tools through an innovative, easy-to-use object-oriented interface.

The resultant statistical inference will include:

1) Test of significant relationships (F)

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

variability of the dependent variable.

2) Test of significant parameters (t)

This test involves the estimation of each explanatory variable’s parameter

(-coefficient) and how statistically significant it is in explaining the dependent

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

3.7 CHAPTER SUMMARY

This chapter started with formulating seven hypotheses of this study. This study

formulates a multivariate panel regression model building on Ahmad, R. , Ariff, &

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

included in the study.

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

between the variables.

4.0 DESCRIPTIVE STATISTICS

Table 2 and 3 present the descriptive statistics and the pair-wise correlation matrix of

the regression variables respectively.

Table 2: Pooled-sample descriptive statistic of the selected dependent and explanatory

non-dummy variables

CAR LLR NIM ROA LASCF EQTL SIZE


Mean 13.45799 3.314170 2.777574 0.749921 20.06831 8.350588 8.806542
Median 11.40000 2.255000 2.200000 0.485000 17.02000 6.440000 9.345650
Maximum 79.50000 44.93000 18.94000 5.740000 94.76000 50.63000 15.12280
Minimum -2.500000 0.270000 0.420000 -7.240000 1.100000 -14.50000 -1.024400
Std. Dev. 7.375411 3.565823 1.794236 0.980487 12.74313 6.529530 2.677424
Skewness 3.372038 5.432452 2.842429 -0.278481 1.729863 2.666552 -1.297330
Kurtosis 20.35500 50.09232 16.28226 15.37680 7.127386 13.41194 5.275581

Jarque-Bera 13751.59 92650.72 8279.859 6088.646 1150.532 5428.401 472.4512


Probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000

Sum 12812.01 3155.090 2644.250 713.9243 19105.03 7949.760 8383.828


Sum Sq.
Dev. 51731.24 12092.05 3061.537 914.2491 154430.4 40545.66 6817.337

Observations 952 952 952 952 952 952 952


Cross
sections 238 238 238 238 238 238 238
CAR: risk weighted capital adequacy ratio
LLR: loan loss reserve/gross loan
NIM: net interest margin
ROA: return on average asset
EQTL: total equity to total liability
SIZE: Natural log of total assets

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

CAR LLR NIM LASCF SIZE EQTL ROA


CAR 1
LLR 0.3108 1
NIM 0.3840 0.1154 1
LASCF 0.4196 0.2819 0.1320 1
SIZE -0.3757 -0.3116 -0.4075 -0.1591 1
EQTL 0.7732 0.2678 0.4124 0.3705 -0.4632 1
ROA 0.5828 0.1709 0.5897 0.2705 -0.3102 0.5635 1

4.1 TEST OF MULTICOLLINEARITY

Multicollinearity is a statistical phenomenon in which two or more independent

variables in a multiple regression model are highly correlated. In the presence of

multicollinearity, the estimate of one variable's impact on dependent variable while

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

method of detecting the problem of multicollinearity. More precisely, the VIF is an

index which measures how much the variance of a coefficient (square of the standard

deviation) is increased because of collinearity. Considering the following regression

equation with k independent variables

Y = β0 + β1 X1 + β2 X 2 + ... + βk Xk + ε (3)

VIF can be calculated in three steps:

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).

If i = 1, for example, the equation would be

X1 = c0 + 2 X2 + 3 X3 + … + k Xk+ ε (4)

where c0 is a constant and ε is the error term.

Step 2:


Then, calculate the VIF factor for  i with the following formula:

 1
VIF ( i )  (5)
1  Ri2

where Ri2 is the coefficient of determination of the regression equation in step 1.

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

4 presents the R-squared and VIF of the independent variable.

Table 4: Multicollinearity Test

Variables R-squared VIF


LLR 0.159271 1.189443923
NIM 0.408340 1.690159889
LASCF 0.184429 1.226134818
SIZE 0.314398 1.458572175
EQTL 0.453462 1.829698941
ROA 0.479944 1.922869845

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

that no multicollinearity problem

4.2 ANALYSIS OF VARIANCE

The relationship between capital ratio and its determinants is examined with an

analysis of variance (ANOVA). We investigate the relationship for the determinants

stated in chapter 3.4. The ANOVA F-tests is summarized in Table 5 which presents the

probabilities at which the null hypothesis of no significant effects can be rejected.

That is, it gives the probability that all effects of the given determinants are zero.

Table 5: Test for Equality of Means Between Series

Test for Equality of Means Between Series


Date: 03/31/09 Time: 19:58
Sample: 2004 2007
Included observations: 952

Method df Value Probability

43
Anova F-statistic (6, 6657) 1087.888 0.0000

Analysis of Variance

Source of Variation df Sum of Sq. Mean Sq.

Between 6 264341.2 44056.86


Within 6657 269592.5 40.49760

Total 6663 533933.7 80.13413

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

indicate there is a strong relationship between the explanatory variables (EQTL,

LASCF, LLR, NIM, SIZE, ROA) and the dependent variable (CAR).

4.3 FINDINGS AND RESULTS

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

Yit  a  BX it  it (6)

it   'it  vit (7)

44
Where it is a random term which comprised of two components,  ' it refers to the

unobserved individual or firm-specific effects and vit refers to the remaining

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.

Table 6: Lagrange Multiplier Tests – Glesjer Test

Dependent Variable: UHATABS


Method: Panel Least Squares
Date: 04/01/09 Time: 15:30
Sample: 2004 2007
Cross-sections included: 238
Total panel (balanced) observations: 952

Variable Coefficient Std. Error t-Statistic Prob.

C -0.258265 0.523881 -0.492984 0.6221


LLR 0.000780 0.028185 0.027662 0.9779
NIM -0.111932 0.066772 -1.676318 0.0940
LASCF 0.031873 0.008008 3.980308 0.0001
SIZE -0.027409 0.041568 -0.659383 0.5098
EQTL 0.308586 0.019091 16.16425 0.0000
ROA 0.067828 0.130331 0.520429 0.6029

R-squared 0.375104 Mean dependent var 2.459418


Adjusted R-squared 0.371137 S.D. dependent var 3.583648
S.E. of regression 2.841865 Akaike info criterion 4.934124
Sum squared resid 7632.008 Schwarz criterion 4.969849
Log likelihood -2341.643 F-statistic 94.54206
Durbin-Watson stat 0.640847 Prob(F-statistic) 0.000000

LM = nR2= 952 x 0.375104 = 357.099008

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

effects model is the better choice to run.

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

the expanded specifications with the baseline models.

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, **

indicates significance at the 5% level, *** indicates significance at the 1% 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)

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


17480.5 15618.63 3162.287 17401.21 15604.35 3118.284
resid)
Adjusted R-square 0.6589 0.69915 0.917424 0.6593 0.6925 0.918341
Durbin-Watson stat 0.4206 0.465303 2.050998 0.4229 0.4664 2.096835
F-Statistic 184.6956*** 135.1163*** 43.7757*** 154.3757*** 120.0035*** 43.95155***
Number of
952 952 952 952 952 952
Observations

48
Baseline model results

Without country-binary variables,

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

significant contribution to explaining the banking institutions’ capital adequacy ratio.

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

significant contribution in explaining banks’ capital adequacy ratio.

Table 8: Wald test for bank specific variables

Wald Test:
Equation: Untitled

Test Statistic Value df Probability

F-statistic 272.3492 (6, 944) 0.0000


Chi-square 1634.095 6 0.0000

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(2) 0.184165 0.042715


C(3) 0.045599 0.102000
C(4) 0.068897 0.012129
C(5) 0.019024 0.062950
C(6) 0.671137 0.028912
C(7) 1.219568 0.207361

Restrictions are linear in coefficients.

The coefficient on the regulatory pressure, REG is negatively and statistically


significant to the model at 1% significance level. This indicates that high regulatory

requirements may have caused the low capital banks to reduce their capital adequacy

ratio.

With country-binary variables

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

significant contribution in explaining the capital adequacy ratio in column (2).

Table 9: Wald test for country binary variable

Wald Test:
Equation: Untitled

Test Statistic Value df Probability

F-statistic 18.37708 (6, 938) 0.0000


Chi-square 110.2625 6 0.0000

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(9) 2.418578 0.964762

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

Restrictions are linear in coefficients.

The coefficient on the regulatory pressure, REG is negatively and statistically

significance at 0.01 level. This indicates that high regulatory requirements may have

caused the low capital banks to reduce their capital adequacy ratio.

With Firm Fixed effects

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.

Table 10: Wald test on country macroeconomic variables

Wald Test:
Equation: Untitled

Test Statistic Value df Probability

F-statistic 1.599517 (2, 942) 0.2025


Chi-square 3.199034 2 0.2020

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(9) 0.114586 0.107395


C(10) -0.030973 0.017945

Restrictions are linear in coefficients.


Column (5) and (6) present Model results with country macroeconomic variables with

added country fixed effects specification and firm fixed effects specification

respectively. These two model provide similar results with column (4) and both the

R-squared and Durbin Watson statistic are improved.

4.4 SUMMARY AND DISCUSSION OF THE FINDINGS

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

the financial institutions. Therefore it is important to include firm fixed effects.

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.

H2: Management Quality has no statistically significant impact on banks’ target

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

relationship between bank management quality and bank capital.

H3: Bank Liquidity has no statistically significant impact on banks’ target

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

German Banks. Liquidity is significantly positively related to capital ratio also

implies that banks do not treat liquidity as a substitute for capital for self-insurance

purposes (Yu, 2000).

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).

H5: Bank Leverage has no statistically significant impact on banks’ target

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

consistent with main reference (Ahmad, R. , Ariff, & Michael, 2008)

H6: Bank Profitability has no statistically significant impact on banks’ target

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

capital cushioning according to the profitability level (Yu, 2000).

H7: Regulatory pressure has no statistically significant impact on target capital

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

Variables Sign Reject Null Hypothesis Significance Level


LLR + Yes 0.01
NIM - Yes 0.10
LASCF + Yes 0.01
SIZE - No Nil
EQTL + Yes 0.01
ROA + Yes 0.01
REG - Yes 0.01

4.5 ROBUSTNESS CHECK

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

country, shown in Table 13.

4.5.1 ROBUSTNESS CHECK – JAPANESE BANK EXCLUDED

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

50 per cent of Japanese Banks.

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, **

indicates significance at the 5% level, *** indicates significance at the 1% 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

adequacy ratio; both variable significant at 0.01 level.

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

show a negative relationship with capital adequacy ratio at 1% significance level.

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

Banks, 32 Indonesian Banks, 28 Malaysian Banks, 13 Philippines Banks and 12

Thailand Banks. It is interesting to investigate the relationship between the

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.

Finally, samples in Japan, Korea, Indonesia, Malaysia and Philippines show

significant positive relationship between ROA and capital adequacy ratio.


Table 13: Determinants of capital ratio according to country

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
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

matrix of the regression variables respectively. Test of multicollinearity is conducted

to avoid variables redundancy. The VIF for all the independent variables is less than 5

indicate that there is no multicollinearity problem. Next, the analysis of variance

shows there is a strong relationship between the explanatory variables (EQTL,

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

unobserved individual heterogeneity is uncorrelated with the independent variables.

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

impact on banks’ target capital ratio is not rejected.

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

consists of almost 50 per cent of Japanese Banks.

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

independent variables and dependent variable which are at least significant at 10 %

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.

5.0 OVERVIEW OF THE STUDY

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

structure of banks. In this model, SIZE is insignificant. However, the negative

relationship between SIZE and capital provides economic meaning because it is

reasonable for large banks hold lesser 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

to the target capital level.

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

in terms of those selected significant variables.

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

relationship which is consistent with the literature.

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

capitalized banks responded according to the intention of the regulator by reducing

their capital ratio.

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.

5.2 LIMITATIONS OF THE STUDY

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

unavailability of data in the bankscope database.

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.

5.4 RECOMMENDATIONS FOR FUTURE RESEARCH

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

effectiveness of the capital regulations especially in determining the minimum amount

of bank capital in East Asia region.

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

exactly the same with our main references.

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

banks can also be included in the future studies.

72
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75
APPENDICES

A) OLS results in EVIEWS

Bank Specific Variable only

Table 14: Bank Specific Variable only - Period Fixed


Dependent Variable: CAR
Method: Panel Least Squares
Date: 04/16/09 Time: 01:22
Sample: 2004 2007
Cross-sections included: 238
Total panel (balanced) observations: 952

Variable Coefficient Std. Error t-Statistic Prob.

C 4.840649 0.796409 6.078098 0.0000


LLR 0.177970 0.043145 4.124965 0.0000
NIM 0.047498 0.102118 0.465131 0.6419
LASCF 0.071055 0.012310 5.771979 0.0000
SIZE 0.019832 0.063022 0.314690 0.7531
EQTL 0.671225 0.028943 23.19095 0.0000
ROA 1.206876 0.207975 5.802978 0.0000
REG -3.151803 0.601907 -5.236366 0.0000

Effects Specification

Period fixed (dummy variables)

R-squared 0.662477 Mean dependent var 13.45799


Adjusted R-squared 0.658890 S.D. dependent var 7.375411
S.E. of regression 4.307581 Akaike info criterion 5.770117
Sum squared resid 17460.50 Schwarz criterion 5.826256
Log likelihood -2735.576 F-statistic 184.6956
Durbin-Watson stat 0.420634 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 6.268976 0.939146 6.675189 0.0000


LLR 0.196154 0.046778 4.193277 0.0000
NIM -0.686110 0.132124 -5.192915 0.0000

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

Period fixed (dummy variables)

R-squared 0.698081 Mean dependent var 13.45799


Adjusted R-squared 0.692915 S.D. dependent var 7.375411
S.E. of regression 4.087103 Akaike info criterion 5.671246
Sum squared resid 15618.63 Schwarz criterion 5.758006
Log likelihood -2682.513 F-statistic 135.1163
Durbin-Watson stat 0.465303 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 11.98769 4.158977 2.882364 0.0041


LLR 0.177985 0.054297 3.277964 0.0011
NIM -0.312744 0.171948 -1.818824 0.0694
LASCF 0.056081 0.012412 4.518410 0.0000
SIZE -0.447373 0.453602 -0.986268 0.3243
EQTL 0.530283 0.036585 14.49460 0.0000
ROA 0.407843 0.136650 2.984583 0.0029
REG -2.498177 0.463165 -5.393705 0.0000

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.938871 Mean dependent var 13.45799


Adjusted R-squared 0.917424 S.D. dependent var 7.375411
S.E. of regression 2.119407 Akaike info criterion 4.559371

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

Bank Specific and Country Macro Variables


Table 17: Bank Specific and Country Macro Variables - Period Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 04/16/09 Time: 01:24
Sample: 2004 2007
Cross-sections included: 238
Total panel (balanced) observations: 952

Variable Coefficient Std. Error t-Statistic Prob.

C 5.094072 0.841358 6.054587 0.0000


LLR 0.187044 0.043435 4.306272 0.0000
NIM -0.025217 0.111725 -0.225708 0.8215
LASCF 0.076000 0.012657 6.004705 0.0000
SIZE 0.058591 0.067648 0.866120 0.3866
EQTL 0.672968 0.029091 23.13347 0.0000
ROA 1.238445 0.211966 5.842667 0.0000
REG -3.113679 0.613185 -5.077874 0.0000
RGDP 0.114586 0.107395 1.066951 0.2863
BANK -0.030973 0.017945 -1.725963 0.0847

Effects Specification

Period fixed (dummy variables)

R-squared 0.663623 Mean dependent var 13.45799


Adjusted R-squared 0.659324 S.D. dependent var 7.375411
S.E. of regression 4.304839 Akaike info criterion 5.770918
Sum squared resid 17401.21 Schwarz criterion 5.837264
Log likelihood -2733.957 F-statistic 154.3757
Durbin-Watson stat 0.422869 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 4.899971 1.755687 2.790914 0.0054

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

Period fixed (dummy variables)

R-squared 0.698357 Mean dependent var 13.45799


Adjusted R-squared 0.692538 S.D. dependent var 7.375411
S.E. of regression 4.089611 Akaike info criterion 5.674533
Sum squared resid 15604.35 Schwarz criterion 5.771500
Log likelihood -2682.078 F-statistic 120.0035
Durbin-Watson stat 0.466382 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 19.17248 5.025740 3.814857 0.0001


LLR 0.152149 0.054685 2.782292 0.0055
NIM -0.377584 0.173389 -2.177672 0.0298
LASCF 0.054706 0.012497 4.377597 0.0000
SIZE -1.558357 0.618325 -2.520287 0.0119
EQTL 0.500944 0.037650 13.30527 0.0000
ROA 0.385486 0.136084 2.832700 0.0047
REG -2.407661 0.464358 -5.184921 0.0000
BANK 0.036864 0.025299 1.457126 0.1455
RGDP 0.414991 0.152244 2.725836 0.0066

Effects Specification

79
Cross-section fixed (dummy variables)
Period fixed (dummy variables)

R-squared 0.939721 Mean dependent var 13.45799


Adjusted R-squared 0.918341 S.D. dependent var 7.375411
S.E. of regression 2.107605 Akaike info criterion 4.549560
Sum squared resid 3118.284 Schwarz criterion 5.825444
Log likelihood -1915.591 F-statistic 43.95155
Durbin-Watson stat 2.096835 Prob(F-statistic) 0.000000

Robustness check (I) – without Japanese Bank


Bank Specific Variables only
Table 20: Robustness check (I), Bank Specific Variables only, Period Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 04/17/09 Time: 04:12
Sample: 2004 2007
Cross-sections included: 129
Total panel (balanced) observations: 516

Variable Coefficient Std. Error t-Statistic Prob.

C 4.683984 1.165745 4.018019 0.0001


LLR 0.170611 0.058072 2.937931 0.0035
NIM -0.003827 0.145794 -0.026250 0.9791
LASCF 0.070513 0.017371 4.059276 0.0001
SIZE 0.017398 0.087410 0.199034 0.8423
EQTL 0.693456 0.040596 17.08207 0.0000
ROA 1.392797 0.338345 4.116503 0.0000
REG -4.335442 1.207582 -3.590185 0.0004

Effects Specification

Period fixed (dummy variables)

R-squared 0.618979 Mean dependent var 16.33952


Adjusted R-squared 0.611434 S.D. dependent var 8.922879
S.E. of regression 5.562083 Akaike info criterion 6.290910
Sum squared resid 15623.07 Schwarz criterion 6.381428
Log likelihood -1612.055 F-statistic 82.03855
Durbin-Watson stat 0.431214 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 5.988904 1.245839 4.807127 0.0000


LLR 0.209203 0.062145 3.366352 0.0008
NIM -0.710025 0.180037 -3.943770 0.0001
LASCF 0.021735 0.019130 1.136172 0.2564
SIZE -0.221840 0.123509 -1.796145 0.0731
EQTL 0.658607 0.039699 16.58985 0.0000
ROA 1.563481 0.321779 4.858868 0.0000
REG -4.522919 1.229889 -3.677501 0.0003
D1 3.737307 1.340084 2.788860 0.0055
D2 2.523411 1.469872 1.716755 0.0866
D3 8.098714 1.220410 6.636058 0.0000
D4 3.808960 1.294715 2.941931 0.0034
D5 3.935707 1.135042 3.467456 0.0006

Effects Specification

Period fixed (dummy variables)

R-squared 0.661590 Mean dependent var 16.33952


Adjusted R-squared 0.651438 S.D. dependent var 8.922879
S.E. of regression 5.267992 Akaike info criterion 6.191692
Sum squared resid 13875.87 Schwarz criterion 6.323355
Log likelihood -1581.457 F-statistic 65.16655
Durbin-Watson stat 0.485719 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 14.97642 7.709501 1.942593 0.0528


LLR 0.174536 0.072875 2.395005 0.0171
NIM -0.401657 0.230981 -1.738916 0.0829
LASCF 0.066862 0.018748 3.566353 0.0004
SIZE -0.699954 0.929372 -0.753147 0.4518
EQTL 0.506597 0.051152 9.903668 0.0000
ROA 0.541179 0.233939 2.313336 0.0212
REG -5.564815 1.030079 -5.402319 0.0000

Effects Specification

81
Cross-section fixed (dummy variables)
Period fixed (dummy variables)

R-squared 0.929432 Mean dependent var 16.33952


Adjusted R-squared 0.903600 S.D. dependent var 8.922879
S.E. of regression 2.770403 Akaike info criterion 5.100761
Sum squared resid 2893.525 Schwarz criterion 6.244576
Log likelihood -1176.996 F-statistic 35.98071
Durbin-Watson stat 2.088283 Prob(F-statistic) 0.000000

Bank Specific Variables and Country Macro Variable


Table 23: Robustness check (I), Bank Specific Variables and Country Macro Variable,
Period Fixed
Dependent Variable: CAR
Method: Panel Least Squares
Date: 04/17/09 Time: 04:17
Sample: 2004 2007
Cross-sections included: 129
Total panel (balanced) observations: 516

Variable Coefficient Std. Error t-Statistic Prob.

C 4.833197 1.553230 3.111707 0.0020


LLR 0.176801 0.058503 3.022106 0.0026
NIM -0.093113 0.166513 -0.559193 0.5763
LASCF 0.074514 0.017680 4.214692 0.0000
SIZE 0.067998 0.096591 0.703976 0.4818
EQTL 0.696891 0.041183 16.92192 0.0000
ROA 1.406129 0.339074 4.146965 0.0000
REG -4.482268 1.280506 -3.500387 0.0005
RGDP 0.141418 0.170881 0.827582 0.4083
BANK -0.030836 0.024992 -1.233826 0.2178

Effects Specification

Period fixed (dummy variables)

R-squared 0.620141 Mean dependent var 16.33952


Adjusted R-squared 0.611079 S.D. dependent var 8.922879
S.E. of regression 5.564620 Akaike info criterion 6.295606
Sum squared resid 15575.40 Schwarz criterion 6.402581
Log likelihood -1611.266 F-statistic 68.43143
Durbin-Watson stat 0.434131 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 3.553628 3.159517 1.124738 0.2612


LLR 0.205655 0.062395 3.295998 0.0011
NIM -0.710179 0.180313 -3.938595 0.0001
LASCF 0.022446 0.019175 1.170636 0.2423
SIZE -0.222891 0.123681 -1.802150 0.0721
EQTL 0.658693 0.039756 16.56825 0.0000
ROA 1.539072 0.323513 4.757377 0.0000
REG -4.323268 1.266180 -3.414418 0.0007
RGDP 0.286014 0.407196 0.702400 0.4828
BANK 0.041044 0.076068 0.539574 0.5897
D1 0.979555 3.739247 0.261966 0.7935
D2 2.352348 1.845268 1.274800 0.2030
D3 8.119179 1.251044 6.489922 0.0000
D4 2.153715 3.180446 0.677174 0.4986
D5 3.804614 1.231374 3.089730 0.0021

Effects Specification

Period fixed (dummy variables)

R-squared 0.662068 Mean dependent var 16.33952


Adjusted R-squared 0.650532 S.D. dependent var 8.922879
S.E. of regression 5.274833 Akaike info criterion 6.198032
Sum squared resid 13856.28 Schwarz criterion 6.346152
Log likelihood -1581.092 F-statistic 57.39226
Durbin-Watson stat 0.482927 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 14.80017 7.662834 1.931423 0.0542


LLR 0.135787 0.073360 1.850964 0.0650
NIM -0.461503 0.230206 -2.004740 0.0457
LASCF 0.067568 0.018570 3.638466 0.0003
SIZE -1.529485 0.969814 -1.577092 0.1156

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

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.931253 Mean dependent var 16.33952


Adjusted R-squared 0.905588 S.D. dependent var 8.922879
S.E. of regression 2.741697 Akaike info criterion 5.082362
Sum squared resid 2818.839 Schwarz criterion 6.242636
Log likelihood -1170.249 F-statistic 36.28423
Durbin-Watson stat 2.119026 Prob(F-statistic) 0.000000

Regression Results based on Size


Table 26: Large Bank
Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 01:12
Sample: 2004 2007
Cross-sections included: 71
Total panel (balanced) observations: 284

Variable Coefficient Std. Error t-Statistic Prob.

C 4.524379 4.229109 1.069818 0.2860


LLR 0.091463 0.100906 0.906418 0.3658
NIM 0.232802 0.254494 0.914765 0.3614
LASCF 0.002633 0.015001 0.175505 0.8609
SIZE 0.135970 0.380993 0.356885 0.7215
EQTL 0.796362 0.074049 10.75450 0.0000
ROA -0.197102 0.109662 -1.797366 0.0738
REG -2.271375 0.437695 -5.189405 0.0000

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.934772 Mean dependent var 11.42866


Adjusted R-squared 0.909066 S.D. dependent var 2.731801
S.E. of regression 0.823782 Akaike info criterion 2.684833
Sum squared resid 137.7592 Schwarz criterion 3.725561
Log likelihood -300.2462 F-statistic 36.36431
Durbin-Watson stat 1.733927 Prob(F-statistic) 0.000000

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

Variable Coefficient Std. Error t-Statistic Prob.

C 14.03767 5.235368 2.681314 0.0078


LLR 0.504685 0.125066 4.035337 0.0001
NIM -0.436879 0.342256 -1.276468 0.2029
LASCF 0.041560 0.015061 2.759422 0.0062
SIZE -0.876640 0.560399 -1.564315 0.1189
EQTL 0.644667 0.058109 11.09417 0.0000
ROA 0.610400 0.203040 3.006311 0.0029
REG -1.469866 0.420286 -3.497299 0.0005

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.901578 Mean dependent var 11.37560


Adjusted R-squared 0.864404 S.D. dependent var 3.739241
S.E. of regression 1.376915 Akaike info criterion 3.706629
Sum squared resid 527.0585 Schwarz criterion 4.797171
Log likelihood -605.6728 F-statistic 24.25301
Durbin-Watson stat 1.550385 Prob(F-statistic) 0.000000

Table 28: Small Bank


Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 01:20
Sample: 2004 2007
Cross-sections included: 71
Total panel (balanced) observations: 284

Variable Coefficient Std. Error t-Statistic Prob.

C 13.45310 10.13511 1.327376 0.1859


LLR 0.118806 0.093818 1.266338 0.2068
NIM -0.355011 0.313244 -1.133336 0.2584
LASCF 0.076150 0.026595 2.863271 0.0046
SIZE -0.329533 1.259126 -0.261716 0.7938
EQTL 0.445653 0.070103 6.357112 0.0000
ROA 0.600918 0.313710 1.915517 0.0568
REG -5.254101 1.401546 -3.748790 0.0002

85
Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.934448 Mean dependent var 18.30296


Adjusted R-squared 0.908615 S.D. dependent var 11.08320
S.E. of regression 3.350441 Akaike info criterion 5.490716
Sum squared resid 2278.768 Schwarz criterion 6.531444
Log likelihood -698.6816 F-statistic 36.17245
Durbin-Watson stat 2.201147 Prob(F-statistic) 0.000000

Regression Results Based On Country


Table 29: Regression Results, China
Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 03:01
Sample: 2004 2007
Cross-sections included: 26
Total panel (balanced) observations: 104

Variable Coefficient Std. Error t-Statistic Prob.

C 5.731138 18.03368 0.317802 0.7516


LLR 0.921922 0.426739 2.160387 0.0342
NIM 0.812396 0.746274 1.088603 0.2801
LASCF -0.004850 0.043259 -0.112105 0.9111
SIZE -0.709365 1.801794 -0.393699 0.6950
EQTL 1.301001 0.094177 13.81446 0.0000
ROA 0.291554 0.960196 0.303640 0.7623

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.923674 Mean dependent var 10.23942


Adjusted R-squared 0.886064 S.D. dependent var 4.718828
S.E. of regression 1.592810 Akaike info criterion 4.031669
Sum squared resid 175.0560 Schwarz criterion 4.921608
Log likelihood -174.6468 F-statistic 24.55938
Durbin-Watson stat 1.883226 Prob(F-statistic) 0.000000

Table 30: Regression Results, Japan


Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 03:00
Sample: 2004 2007

86
Cross-sections included: 109
Total panel (balanced) observations: 436

Variable Coefficient Std. Error t-Statistic Prob.

C -6.446072 9.290613 -0.693826 0.4883


LLR -0.099272 0.071450 -1.389393 0.1657
NIM 0.575516 0.479732 1.199661 0.2312
LASCF 0.033007 0.009763 3.381025 0.0008
SIZE 1.489884 0.918475 1.622128 0.1058
EQTL 0.054470 0.060628 0.898433 0.3696
ROA 0.362106 0.061996 5.840798 0.0000

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.917651 Mean dependent var 10.04775


Adjusted R-squared 0.887353 S.D. dependent var 1.776664
S.E. of regression 0.596302 Akaike info criterion 2.029553
Sum squared resid 113.0730 Schwarz criterion 3.133135
Log likelihood -324.4426 F-statistic 30.28722
Durbin-Watson stat 2.135846 Prob(F-statistic) 0.000000

Table 31: Regression Results, Korea


Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 02:42
Sample: 2004 2007
Cross-sections included: 18
Total panel (balanced) observations: 72

Variable Coefficient Std. Error t-Statistic Prob.

C 40.39420 15.57148 2.594113 0.0128


LLR -0.242290 0.473888 -0.511281 0.6117
NIM -0.259819 0.327242 -0.793967 0.4314
LASCF 0.007861 0.020034 0.392379 0.6966
SIZE -2.665685 1.382805 -1.927737 0.0602
EQTL 0.085856 0.062956 1.363754 0.1794
ROA 0.649431 0.351681 1.846645 0.0714

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.893787 Mean dependent var 12.08750


Adjusted R-squared 0.832420 S.D. dependent var 1.634999

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

Table 32: Regression Results, Indonesia


Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 02:45
Sample: 2004 2007
Cross-sections included: 32
Total panel (balanced) observations: 128

Variable Coefficient Std. Error t-Statistic Prob.

C 33.61557 20.42290 1.645974 0.1034


LLR 0.187517 0.194021 0.966478 0.3365
NIM -0.883440 0.374218 -2.360759 0.0205
LASCF 0.069901 0.037820 1.848259 0.0680
SIZE -2.672556 2.724926 -0.980781 0.3294
EQTL 0.624025 0.136754 4.563119 0.0000
ROA 0.613175 0.602363 1.017949 0.3115

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.954145 Mean dependent var 21.70195


Adjusted R-squared 0.933063 S.D. dependent var 11.82020
S.E. of regression 3.058151 Akaike info criterion 5.328001
Sum squared resid 813.6493 Schwarz criterion 6.241542
Log likelihood -299.9921 F-statistic 45.25747
Durbin-Watson stat 2.242310 Prob(F-statistic) 0.000000

Table 33: Regression Results, Malaysia


Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 02:50
Sample: 2004 2007
Cross-sections included: 28
Total panel (balanced) observations: 112

Variable Coefficient Std. Error t-Statistic Prob.

C -11.90194 20.65291 -0.576284 0.5661


LLR -0.307029 0.150755 -2.036614 0.0452
NIM -0.599086 1.403692 -0.426793 0.6708
LASCF 0.126783 0.041391 3.063068 0.0030

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

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.921251 Mean dependent var 17.89107


Adjusted R-squared 0.883451 S.D. dependent var 8.846301
S.E. of regression 3.020061 Akaike info criterion 5.308135
Sum squared resid 684.0576 Schwarz criterion 6.206210
Log likelihood -260.2555 F-statistic 24.37195
Durbin-Watson stat 2.046745 Prob(F-statistic) 0.000000

Table 34: Regression Results, Philippines


Dependent Variable: CAR
Method: Panel Least Squares
Date: 05/10/09 Time: 02:55
Sample: 2004 2007
Cross-sections included: 13
Total panel (balanced) observations: 52

Variable Coefficient Std. Error t-Statistic Prob.

C 53.62602 26.41877 2.029846 0.0513


LLR 0.097817 0.155821 0.627754 0.5349
NIM 1.089640 1.244712 0.875415 0.3883
LASCF 0.026018 0.071662 0.363062 0.7191
SIZE -6.307533 3.182478 -1.981957 0.0567
EQTL 0.595044 0.249097 2.388802 0.0234
ROA 2.371279 1.296926 1.828384 0.0775

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.846081 Mean dependent var 19.39154


Adjusted R-squared 0.738338 S.D. dependent var 5.748030
S.E. of regression 2.940285 Akaike info criterion 5.290998
Sum squared resid 259.3583 Schwarz criterion 6.116524
Log likelihood -115.5659 F-statistic 7.852752
Durbin-Watson stat 2.490223 Prob(F-statistic) 0.000000

Table 35: Regression Results, Thailand


Dependent Variable: CAR
Method: Panel Least Squares

89
Date: 05/10/09 Time: 02:58
Sample: 2004 2007
Cross-sections included: 12
Total panel (balanced) observations: 48

Variable Coefficient Std. Error t-Statistic Prob.

C 14.70383 14.48386 1.015187 0.3190


LLR -0.192779 0.167899 -1.148180 0.2610
NIM 0.322706 0.382824 0.842962 0.4067
LASCF 0.073496 0.036815 1.996364 0.0561
SIZE -1.700606 1.450343 -1.172554 0.2512
EQTL 1.150237 0.125861 9.138957 0.0000
ROA -0.587712 0.736396 -0.798092 0.4318

Effects Specification

Cross-section fixed (dummy variables)


Period fixed (dummy variables)

R-squared 0.945619 Mean dependent var 14.70792


Adjusted R-squared 0.905336 S.D. dependent var 3.775515
S.E. of regression 1.161630 Akaike info criterion 3.437160
Sum squared resid 36.43335 Schwarz criterion 4.255811
Log likelihood -61.49185 F-statistic 23.47476
Durbin-Watson stat 2.348750 Prob(F-statistic) 0.000000

B) Banks Included In Sample

Table 36: Sample Banks of China


Bank of Beijing Co Ltd
Bank of China Limited
Bank of Communications Co. Ltd
Agricultural Development Bank of China
Bank of Chongqing
Bank of Nanjing
Bank of Ningbo
Bank of Shanghai
China Construction Bank Corporation
China Merchants Bank Co Ltd
China Minsheng Banking Corporation
China Zheshang Bank Co Ltd
Commercial Bank Co Ltd of Luoyang
First Sino Bank
Hua Xia Bank
Industrial Bank Co Ltd
Jinan City Commercial Bank
Laishang Bank Co Ltd

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

Table 37: Sample Banks of Japan


77 Bank (The)
Aichi Bank
Akita Bank Ltd
Aomori Bank Ltd. (The)
Awa Bank (The)
Bank of Ikeda
Bank of Iwate, Ltd
Bank of Kochi, Ltd
Bank of Kyoto
Bank of Nagoya
Bank of Okinawa
Bank of Saga, Ltd. (The)
Bank of the Ryukyus Ltd.
Biwako Bank Ltd
Chiba Bank Ltd.
Chiba Kogyo Bank
Chikuho Bank
Chugoku Bank, Ltd. (The)
Chukyo Bank Ltd
Chuo Mitsui Trust Holdings, Inc
Daisan Bank, Ltd.
Daishi Bank Ltd (The)
Daito Bank
Ehime Bank, Ltd. (The)
Eighteenth Bank (The)
Fukuho Bank, Ltd. (The)
Fukui Bank Ltd. (The)
Fukushima Bank
Gifu Bank Ltd (The)
Gifu Shinkin Bank
Gunma Bank Ltd. (The)
Higashi-Nippon Bank
Higo Bank (The)
Hiroshima Bank Ltd
Hokkaido Bank
Hokkoku Bank Ltd. (The)
Hokuetsu Bank Ltd. (The)
Hokuto Bank

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)

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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)

Table 38: Sample Banks of Korea


Jeju Bank-Cheju Bank, Ltd.
Citibank Korea Inc.
Daegu Bank Ltd.
Export-Import Bank of Korea
Hana Bank
Industrial Bank of Korea
Jeonbuk Bank
Kookmin Bank
Korea Development Bank
Korea Exchange Bank
Kwangju Bank Ltd. (The)
Kyongnam Bank
National Agricultural Cooperative Federation - NACF
Pusan Bank
Shinhan Bank
Standard Chartered First Bank Korea Limited
Woori Bank
Woori Financial Group-Woori Finance Holdings Co. Ltd

Table 39: Sample Banks of Indonesia


Agroniaga Bank Tbk (PT)
ANZ Panin Bank

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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

Table 40: Sample Banks of Malaysia


Affin Bank
Affin Holdings Berhad
Affin Investment Bank Berhad
Alliance Bank Malaysia Berhad
AmBank (M) Berhad
AMMB Holdings Berhad
Bangkok Bank Berhad
Bank Kerjasama Rakyat Malaysia Berhad
Bank of Nova Scotia Berhad
Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad
BIMB Holdings Berhad
Bumiputra-Commerce Holdings Berhad
CIMB Bank Berhad
CIMB Investment Bank Berhad
Citibank Berhad
Deutsche Bank (Malaysia) Bhd.

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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.

Table 41: Sample Banks of Philippines


Allied Banking Corporation
Banco de Oro Unibank, Inc.
Bank of The Philippine Islands
China Banking Corporation - Chinabank
Chinatrust (Philippines) Commercial Bank Corp
Development Bank of the Philippines
Land Bank of the Philippines
Metropolitan Bank & Trust Company
Philippine National Bank
Planters Development Bank
Rizal Commercial Banking Corp.
Security Bank Corporation
Union Bank of the Philippines

Table 42: Sample Banks of Thailand


Bangkok Bank Public Company Limited
Bank of Ayudhya Public Company Ltd.
Kasikornbank Public Company Limited
Kiatnakin Bank Public Company Limited
Krung Thai Bank Public Company Limited
Siam City Bank Public Company Limited
Siam Commercial Bank Public Company Limited
Siam Industrial Credit Public Company Limited (The)
Standard Chartered Bank (Thai) Public Company Limited
Thanachart Bank Public Company Limited
Tisco Bank Public Company Limited
United Overseas Bank (Thai) PCL

95