The Effect of Bank Ownership Concentration on Capital Adequacy, Liquidity, and Capital Stability (Basel II and Basel III)
46 Pages Posted: 19 Jul 2011 Last revised: 11 Jan 2013
Date Written: July 17, 2011
We explore the effects of ownership concentration on the risk-taking behavior of banks. Our analysis focuses on East Asian countries because these nations have successfully implemented the Basel standards and demonstrate a high degree of regulatory convergence. For the period from 2005 to 2009, we analyze the relation between ownership concentration and capital adequacy (Basel II) and find that an increase in ownership concentration by one standard deviation results in an improvement in capital adequacy by 7.64%. Although Basel III does not go into effect until 2013, we retroactively apply the standards for capital stability on our sample. We find that ownership concentration would have been a significant determinant of capital stability. While at lower levels of ownership concentration, an increase in concentrated ownership would have reduced capital stability; at higher ownership levels, greater ownership concentration would have increased capital stability. We also find that concentrated ownership improves banks’ liquidity. Further, the recent financial crisis does not appear to change the fundamental associations among ownership concentration, capital adequacy, and liquidity.
Keywords: Basel III, Bank Ownership, Capital Adequacy, Capital Stability, Financial Crisis, Basel II
JEL Classification: G01, G18, G21, G28, G34, G38
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