Bank performance during the credit crisis: evidence from Asia-Pacific countries

ABSTRACT

This paper investigates the determinants of the stock performance of small and medium banks across Asia-Pacific countries during the global financial crisis of 2007–2008. We find that small and medium banks with more Tier 1 capital, more deposits, more liquid assets, and less funding fragility performed better during the crisis. We also find differences in banking regulations across countries are generally uncorrelated with the performance of small and medium banks during the crisis. Furthermore, there is no systematic evidence that better bank governance is associated with better performance of small and medium banks during the crisis.

KEYWORDS:

• Credit crisis
• bank performance
• bank fragility
• governance

JEL CLASSIFICATION:

• G01
• G21
• G28

Acknowledgments

We are grateful to the Editor, Mark Taylor, and the anonymous referee for helpful comments and suggestions. We thank Jonathan Batten and Silvio Contessi for helpful comments that have improved the paper. This research is funded by National Economics University, Hanoi, Vietnam [Grant number 154/QÐ‐ÐHKTQD]. The usual disclaimers apply

Data availability

Data are available from the data sources identified in the paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We thank the referee for this suggestion.

² Focusing on small and medium banks in Asian-Pacific countries also allows us to examine bank performance in a number of countries that are interesting, but are not investigated in Beltratti and Stulz (2012). These countries are Indonesia, Thailand, the Philippines, Pakistan, and New Zealand.

³ Forbes (2020): How COVID-19 leads to 2008-style bank crisis. Available at https://www.forbes.com/sites/patrickwwatson/2020/03/16/how-covid-19-leads-to-2008-style-bank-crisis/#5747a15c5b77. (Retrieved on 20 May 2020).

⁴ We also consider alternative definitions of the crisis period as a part of the robustness checks in the Online Appendix.

⁵ Beltratti and Stulz (2012) report that the maximum, minimum, and standard deviation of buy-and-hold returns for large banks for the same period are −99%, 29.14% and 27.74%, respectively.

⁶ Funding fragility is defined as deposits from other banks, other deposits plus money markets and short-term funding.

⁷ The average value of non-interest income and income diversity for large banks in the same period are 41.25% and 0.53, respectively, according to Beltratti and Stulz (2012).

⁸ The survey consists of questions sent to regulators and received responses from 142 countries. The four key indices used in our analysis are Official, Capital, Restrict, and Private monitoring. Definitions of these indices are available in Appendix A.

⁹ On the one hand, several studies argue that among poorly-governed banks, bank executives have an incentive to take more risks that are not in the best interest of shareholders (Diamond and Rajan 2009), which may lead to the subsequent poor performance. To that extent, one can expect that poor bank governance leads to poor performance during the crisis. On the other hand, a body of extant literature, pioneered by Merton (1977), suggests that poor governance can lead executives to take fewer risks to protect their private benefits from control (see, for example, John, Litov, and Yeung (2008)). To that extent, banks with better governance might take more risk, leading to their poor performance during the crisis.

¹⁰ In the Online Appendix, we consider three alternative measures of corporate governance and our findings are robust to different measures of governance.

¹¹ The six governance indices are voice, political stability, government effectiveness, regulatory quality, rule of law, and corruption. Others to use the country governance indices include Djankov et al. (2008) and De Haas and Van Horen (2012).

¹² We follow Gorton and Rosen (1995) and Beltratti and Stulz (2012) and use Concentration as a proxy for the value of bank franchises because a more concentrated bank system allows banks to earn monopoly rents.

¹³ The findings for small and medium banks are different from those for large banks. Beltratti and Stulz (2012) find large banks that performed better during the crisis had lower average returns in 2006.

¹⁴ In tabulated results, we repeat the regressions in Panel A of Table 5 with the bank’s post-crisis performance measured over a shorter period. Specifically, the post-crisis performance of a bank is measured by the bank’s buy-and-hold stock return over the period from January 2009 to December 2010. The results are qualitatively unchanged.

¹⁵ In the Online Appendix, we conduct a set of sensitivity analyses to ensure that the findings are robust. First, we repeat the main regressions using alternative definitions of the crisis period. Second, we use alternative measures of bank performance. Finally, we use three alternative measures of bank governance. Our results are robust to sensitivity analyses.

The table compares characteristics of banks in the bottom quartile of stock return performance relative to those in the top quartile of stock return performance. The sample includes 234 small and medium banks in Bankscope with return available from Datastream, with a loans-to-assets ratio larger than 10% and a deposits-to-assets ratio larger than 20% as of 2006. Definitions of all variables are presented in Appendix A. Returns are in percent. Firm characteristics are computed using data from 2006, prior to the beginning of the financial crisis. The regulation variables come from Barth, Caprio, and Levine (2008). The variable institution is the simple average of six indicators reported by Kaufmann et al. Macroeconomic variables are from the World Bank. *,**, and *** indicate statistical significance at the 10%, 5%, and 1% level, respectively.

The table presents summary statistics for the variables used in this study. The sample includes 234 small and medium banks in Bankscope with return available from Datastream, with a loans-to-assets ratio larger than 10% and a deposits-to-assets ratio larger than 20% as of 2006. Definitions of all variables are presented in Appendix A. Returns are in percent. Firm characteristics are computed using data from 2006, prior to the beginning of the financial crisis. The regulation variables come from Barth, Caprio, and Levine (2008). The variable Institution is the simple average of six indicators reported by Kaufmann et al. (2008). Macroeconomic variables are from the World Bank.

Additional information

Funding

This work was supported by the National Economics University Research Grant [Grant number 154/QÐ‐ÐHKTQD].