Authors: James YK Lau, Professor Timothy Marjoribanks, Dr KB Oh
This paper examines bank risk taking behavior among the eight domestic conventional (non-Islamic) banks in Malaysia using dataset from quarterly disclosures to the local stock exchange. Using panel data econometric models, we find bank risk behavior moderated immediately after the GFC and has since risen to near that of the pre-GFC period. The Research makes a significant contribution to understanding bank risk behavior following the devastation of the Malaysian banking industry caused by the 1997/1998 Asian Financial Crisis (AFC). Specifically, the analysis identifies among the accounting variables, asset quality, leverage and income diversification as key emerging risk factors. Among bank specific characteristics, we find shareholding concentration and state ownership to be risk increasing while size has no significant effect at all. Further, there is clear evidence that the effectiveness of corporate governance in moderating bank risk behavior depends on ownership type. Importantly, we find corporate governance less effective at state controlled banks compared to non-state controlled banks. While this research offers evidence of credible regulatory reforms and provide banks the opportunity to consider effective corporate governance as a competitive advantage, the findings have important implications for regulations aimed at controlling the public cost of moral hazards especially when such moral hazards are conflated with state ownership.
Keywords: bank risk factors, bank risk behaviour, ownership, corporate governnance, competitive advantage, moral hazard.