Financial markets development and bank risk: Experience from Thailand during 1990–2012
a) Origion of concept:
The longitudinal study aims to understand the impact of the evolution of financial markets development bank behavior. The focus on Thailand during the period 1990–2012
b) Theoritical background:
captures the events surroundingthe Asian financial crisis of 1997–19982and the global financial crisis of 2007–2009.
c) Significance/ Importance:
Several studies have highlighted the benefits and costs of financial markets development. Essentially, financial markets development is thought to lead to economic growth by providing firms with better access to financing, thereby promoting domestic investments. Financial markets development (e.g., changes in bank regulations) can also affect the way in which ...view middle of the document...
While the former mainly affected Asian countries, the latter had global impact. Secondly, the paper addresses the relationship between financial markets development and bank risk by addressing the following three questions:
1) Does financial markets development encourage banks to be more leveraged?
2) Doesfinancial markets development affect banks’ portfolio of assets?
3) Did financial reforms implementedafter the Asian financial crisis of 1997–1998 cause banks to be better prepared for future crises?
f) Research contribution:
I find that a measure of stock market development is positively associated with a bank’s capitalization ratio (measured as total capital/total assets), after controlling for macro-level and firm-level variables and is negatively associated with a bank’s risk (implied by a bank’s market beta from the market model). While the measure of banking sector development is not associated with a bank’s capitalization ratio when measured as the total capital to assets ratio, but it is negatively related to a bank’s capitalization ratio when measured as the Tier 1 capital to total risk-weighted assets ratio(CART1).
I conduct further tests to show that the positive effect of stock market developmenton banks’ capitalization ratios mainly appears during 1990–1999, and that this linkage disappearsduring 2000–2012. In the context of my analysis, two dimensions of financial markets developmentseem to have opposing effects on bank risk. While stock market development tends to have no adverse effect on banks’ capitalization ratios and lower the level of a bank’s beta, banking sector developmentinduces the instability of the banking system by lowering the CART1 ratios and by increasing the levelof the beta. In addition, I find that both stock market development and banking sector developmentmeasures are not associated with a bank’s revenue diversification.