Capital thresholds and risk-taking behavior among Malaysian banks: An application of non-dynamic panel threshold model

摘要

Since the introduction of stricter banking regulatory framework of Basel III on Malaysian Banking environment in January 2013, Malaysia banks have started to closely monitor their capital position. Having prudent capital level is crucial to maintain 8% minimum capital together with additional 2.5% cyclical capital buffer. However, limited studies have been devoted to specifically examine the actual impact of capital level to bank's risk-taking appetite especially under developing economy of Malaysia. The study employs panel non-dynamic threshold model with individual specific fixed effects to endogenously investigate the right capital threshold and bank's attitude on risky assets under large and small capital regime. Using a quarterly panel data of mixed banking systems from March 2010 till September 2017, interestingly the study finds negative relationship between capital and risky assets under large capital regime, suggesting that higher capital buffer does reduce the level of risky assets. The results are robust given to the fact that the results are not sensitive to different frequencies data. This finding has strong implication to policy since it suggests that adherence to Basel III capital requirement serves as a strong basis of macro-prudential counter-cyclic and increases bank's ability to absorb adverse shock during financial distress through prudent asset management and enhanced governance.