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East Asia

Bachelor of Science (Financial Mathematics)

University Malaysia Terengganu

2007

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

ii

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

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

iii

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

iv

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

v

LIST OF TABLES

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

vi

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

vii

CHAPTER 1: INTRODUCTION

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

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

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

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

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

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

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

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

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

2

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

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

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.

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

3

I was formulated by the BCBS at the Bank for International Settlements (BIS), an

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

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

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

4

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

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

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

5

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

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.

KOREA

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

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

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

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

6

financial markets. Therefore, in July 1992, the Office introduced the risk-weighted

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

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

MALAYSIA

In 1989, Bank Negara Malaysia introduced the capital adequacy framework (also

known as the Risk Weighted Capital Adequacy Framework). This framework was

7

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 adequacy framework can be divided into three broad categories which consist

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

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

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

8

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

INDONESIA

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

(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

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

9

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

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

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

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),

2007. The new guideline for capital requirements will not only cover all the major

10

risks faced by financial institutions, but will also be more reactive to the riskiness and

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

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

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.

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

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

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

12

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

banks.

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.

13

1.5 ORGANISATION OF THE STUDY

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

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.

relationship between banks risk and capital, surveying previous researched conducted

in this area.

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

14

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

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.

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

Kahane first examines the effectiveness of capital adequacy and the regulations

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

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

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

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

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

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

“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

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

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

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

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

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

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

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

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

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,

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

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

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

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

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

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

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

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

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

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

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.

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.

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

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

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

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

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

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

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

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

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

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

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

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

26

2.6 CHAPTER SUMMARY

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

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

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

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

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

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

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

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

+ ε i, t (1)

where:

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.

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

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

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(%) 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

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

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

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

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

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

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

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

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

sign.

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

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

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

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

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.

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

34

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

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

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

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

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

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

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

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

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.

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

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

37

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

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

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

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

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

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

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

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

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

non-dummy variables

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

Probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000

Sum Sq.

Dev. 51731.24 12092.05 3061.537 914.2491 154430.4 40545.66 6817.337

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 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

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

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

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

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).

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

Step 2:

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

1

VIF ( i ) (5)

1 Ri2

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

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

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

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

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

Date: 03/31/09 Time: 19:58

Sample: 2004 2007

Included observations: 952

43

Anova F-statistic (6, 6657) 1087.888 0.0000

Analysis of Variance

Within 6657 269592.5 40.49760

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

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

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

44

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

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.

Method: Panel Least Squares

Date: 04/01/09 Time: 15:30

Sample: 2004 2007

Cross-sections included: 238

Total panel (balanced) observations: 952

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

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

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

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

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, **

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)

Firm Fixed Effects No No Yes No No Yes

Year Fixed Effects Yes Yes Yes Yes Yes Yes

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

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

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

Wald Test:

Equation: Untitled

Chi-square 1634.095 6 0.0000

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

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.

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

Wald Test:

Equation: Untitled

Chi-square 110.2625 6 0.0000

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

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

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

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.

Wald Test:

Equation: Untitled

Chi-square 3.199034 2 0.2020

C(10) -0.030973 0.017945

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

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

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.

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

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

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

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).

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

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

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

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

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

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

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, **

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

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

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

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.

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%

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

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

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

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

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

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

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.

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

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

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

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

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

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.

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

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.

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

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

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

72

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75

APPENDICES

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

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

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

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

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

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

Period fixed (dummy variables)

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

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

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

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

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

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

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)

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

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

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

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

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

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

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)

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

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

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

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

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

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

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

Period fixed (dummy variables)

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

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

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)

92

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)

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

Agroniaga Bank Tbk (PT)

ANZ Panin Bank

93

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

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.

94

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.

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

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