Post-Crisis Behavior of Banks in Asia: A Case of Chronic Over-Capitalization

• Published in: The Journal of Asian finance, economics, and business Vol. 8; no. 3; pp. 517 - 525
• Main Authors: MOHAMMAD, Khalil Ullah, MUHAMMAD, Affan, MUHAMMAD, Kaleem Ullah
• Format: Journal Article
• Language: Korean
• Published: 한국유통과학회 30.03.2021; Korea Distribution Science Association
• Subjects: Leverage; Financial Crisis; Capital Structure; Central Banking Regulation; Bank Risk
• ISSN: 2288-4637; 2288-4645

The study investigates the behavior of Asian banks in response to the subprime mortgage crisis and examines how countries that have experimented with a mix of conventional and Islamic banking managed their balance sheet during that period. The study carries out an independent mean t-test comparing the difference of leverage of 464 conventional commercial Asian banks pre- and post-crisis from the largest twenty-five Asian economies based on GDP (2007). The analysis uses 10-year unbalanced panel data of conventional banks and employs the generalized least squares estimation using a dummy variable event window method to capture the response of Asian banks. The study finds evidence of a structural change in the capital structure of Asian commercial banks in response to the financial crisis. Findings suggest that conventional banks increased their capital position more in countries that have both Islamic and conventional banking than those countries without Islamic banking services. By having Islamic banking in their product portfolio, countries can exert market discipline on conventional banks. The study identifies a significant role of global macroeconomic shocks on banks liability structure decision-making. Evidence shows that this increase in capital positioning by banks was a permanent rather than a temporary response.