How do banks’ capital regulation and risk-taking respond to COVID-19? Empirical insights of ownership structure

Abstract

Purpose This study aims to investigate the relationship between capital regulation and risk-taking behavior (financial stability) concerning the impacts of the recent global (COVID-19) crisis and diverse ownership structure. Design/methodology/approach The analysis uses an unbalanced panel data set from 32 commercial banks of Bangladesh for 2000–2020. The authors use the two-step system generalized method of moments and three-stage least squares to produce the study outcomes. Findings The robust results reveal that the relationship between capital regulation and risk (financial stability) is negative (positive) and bi-directional. More significantly, COVID-19 makes banks fragile and demands more capital to absorb risk. However, the effect of COVID-19 is heterogeneous when the authors consider ownership structure. Among the diverse ownership styles, Islamic and active shareholding show their controlling wheel on capital regulation and risk-taking aptitude (financial stability) during the global (COVID-19) crisis. In normal economic conditions, private banks and minority active shareholding can be a good determinant for capital regulation and risk (financial stability). On the other hand, state-owned and large banks have been found as less capitalized and highly risky. Originality/value This study is the pioneer in exploring capital regulation and risk toward the recent global (COVID-19) crisis.

Bank capital and risk relationship during COVID-19: a cross-country evidence

“…At the same time, banks with lower capital reduced their risks. Our result is also consistent with Moudud-Ul-Huq et al (2022) study which presents evidences of a negative association between capital and risk for Bangladeshi banks from 2000 to 2020. According to Moudud-Ul-Huq et al (2022), the COVID-19 pandemic intensifies the fragility of banks, necessitating elevated capital levels to manage the heightened risk.…”

“…Consequently, banks with lower capital levels exhibit reduced risk-taking behavior. Moudud-Ul-Huq et al (2022) provided further evidence of a negative relationship between capital and risk for Bangladeshi banks spanning the period of 2000–2020. Moreover, the COVID-19 pandemic exacerbates banks’ fragility, necessitating higher capital levels to cope with greater risk.…”

“…Table 6 also shows that COVID-19 positively impacts bank market risk evidenced by the positive and significant coefficients of covid in total risk, idiosyncratic risk and systematic risk models. These results imply the importance of COVID-19 as an exogenous shock to bank risk (Mateev et al, 2022;Mateev et al, 2021;Moudud-Ul-Huq et al, 2022), and it should be carefully examined in bank risk studies, particularly when considering market risk.…”

“…Among these few studies, Akhigbe et al (2012) found that highly capitalized banks still confront high asset-risks and expected losses during volatile events such as the 2008 global financial crisis. Moudud-Ul-Huq et al (2022) also showed that COVID-19 makes banks more fragile and requires them higher capital level to cope with greater risk.…”

Asset Quality and Financial Stability: An Empirical Review of Commercial Banks in Kenya

“…This risk materializes when borrowers are unable to fulfill their obligations, failing to make payments for both principal and interest (Kim, Koo, & Park, 2013;Masud & Haq, 2016). Improper financial assets management result in the accumulation of excessive liquidity, irresponsible lending policies and the excessive use of complex financial products that constitutes a threat to the financial stability of the banks (Moudud- Ul-Huq, et al, 2021). Emerging evidence reveal that proper policies on financial asset management will enhance financial stability in banks' activities which are positively associated with financial stability in the banking sector (Elliott, 2014).…”