Do the Business Cycle and Revenue Diversification Matter for Banks’ Capital Buffer and Credit Risk: Evidence from ASEAN Banks

Abstract

We examine the association of the business cycle and revenue diversification with the banks’ capital buffer and credit risk for a sample of banks from the Association of Southeast Asian Nations (ASEAN) region from 1998 to 2018, using 2,847 banking firm–year observations. We find that ASEAN banks react anticyclically in adjusting their capital buffer levels and credit risk. We also find that revenue diversification of these banks help reduce credit risk while achieving capital savings when confronting economic downturns. Our results offer support for the Basel III accord. However, the relations revealed are somewhat moderated by the regulatory quality, competition, and phase of the business cycle encountered by ASEAN banks.

Keywords: Basel III Accord, Business Cycle, Capital Buffer, Credit Risk, Revenue Diversification

JEL Classification: G21