IMPACT OF DIVERSIFICATION, COMPETITION AND

REGULATION ON BANKS RISK TAKING: EVIDENCE FROM

ASIAN EMERGING ECONOMIES.

ABSTRACT
This study investigates the impact of diversification, competition and
regulation on banks risk taking. We selected the listed banks of Asian Emerging
Economies. There are total 215 listed banks out of which we have used the sample of
116 listed banks based on the availability of data. Data was extracted from the
financial statements of banks for the year of 2010-2018. In this study, Descriptive
Statistics, Multicollinearity diagnostic tests, Correlation analysis and two step
dynamic panel system GMM were applied to analyze the data.

Overall findings of the study show that diversification, whether income or

assets, competition and regulation significantly related with banks risk taking. Income
diversification reduces banks risk taking while assets diversification is detrimental for
financial stability Asian emerging countries. On the other hand, results find support
for competition-stability view with both measures of competition. Regulation such as
capital to risk weighted assets ratio and deposits insurance reduces overall banks risk
taking.

The findings suggest that the current study is helpful for managers, regulators,
policy makers and researchers. For managers, the study helps them to make the
investing decision. The policy makers should take appropriate risk-taking decision
while considering factors such as diversification, competition and regulation. This
study can also be extended by incorporating market-based measures of bank risk-
taking and considering both developed and emerging economies sample.

Key words: Diversification, Competition, Regulation, Banks Risk Taking, Dynamic Panel
Approach, Asian Emerging Economies

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 CHAPTER NO 1

INTRODUCTION

1.1 Background

Over few decades, in emerging economies banking industry has transformed

through the financial liberalization and deregulation (Cremers & Nair, 2005;
Gompers, Ishii, & Metrick, 2003; Zhang, Jiang, Qu, & Wang, 2013). The expansion
of the financial services sector and banking, rapid capital markets growth and
financial institution development in private sector managed by these policies.
However, in these newly liberalized economies, the debate regarding how bank
diversification along with the level of competition and bank regulation impacted the
financial feasibility of banks have not resolved yet.

Banks have diversified over past couple of decades into a range of areas
shifting towards commission and fee-based services (securities trading, asset
management, investments, insurance) from traditional lending and deposit-taking.
Froot, Scharfstein and Stein (1993) and Froot and Stein (1998) in their respective
studies shows how probability of bank distress can be reduced by asset and income
diversification and shed light on how diversification is important for risk mitigation.
The quality of bank revenues can also be enhanced through diversification by
reducing information asymmetries and boosting the role of intermediation (Baele, De
Jonghe, & Vander Vennet, 2007; Köhler, 2014). Diversification has also shown to
promote financial innovation and competition (Acharya, Hasan, & Saunders, 2006;
Lepetit, Nys, Rous, & Tarazi, 2008).

To develop new financial products FI (financial institutions) are being

encouraged with the aim of satisfying the demand from expanding competitiveness,
market’s development, encouraging financial markets diversification and
liberalization and expansion of business scale. It is important to study and understand
risk taking behavior of banks with respect to diversification, competition and
regulation as excessive bank risk taking often related with failure of banks.

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 In banking industry unlike non-financial companies, diversification might
create value for shareholders. Diversification through economies of scale could
improves banks’ profitability. Banks usually take advantage of their long-term
customer’s relationships that support banks to gather vital, various and significant
information of customer, which banks can use in the creation of their portfolios of
loan. If the economies of scope persist, it is predicted that bank’s stability and
efficiency are positively related with the diversification. Moreover, in the sector of
banking, technological advancement and deregulations are related to benefits of
diversification. (Buch et al., 2013; Iskandar-Datta & McLaughlin, 2007; Köhler,
2015; Le, 2017).

However, diversification can lead to less bank’s stability and further risk and
if the diversification cost surpass it benefits (Boyd, Graham, & Hewitt, 1993). Bank
diversification critics contend that if the operations of bank diversified, a decline in
the management’s comparative advantage can be suffered by banks, then bank will
get into a business way beyond bank’s capabilities, resulting in higher agency costs,
higher competition and inefficiencies.

Inconclusive discussion has been done on bank risk-taking and stability of

banks affected by competition. According to the standard theory of competition-
fragility it implies that banks’ competition for deposits leads banks to fragility, as
more competition weakens the power of market of banks to acquire monopoly rents
and minimize charter value and profitability, their incentive of intensifying their risk-
taking is to compensate for the loss of CV(charter value) and increase profits. (Allen
& Gale, 2004; Keeley, 1990).

In comparison, the modern theory of competition indicates, for the riskiness of

banks competition is not accountable but instead lessened the risk-taking conduct of
banks and boost the individual stability of banks. In more competitive markets, cost of
borrowing decreases due to lower lending rates which increase success rate of
borrower’s investment. Subsequently, on bank’s loan portfolios lower credit risk will
be experienced (Boyd & De Nicoló, 2005; Schaeck & Cihák, 2014). Banks usually
tends to take more risks in less competitive market if large banks get a subsidy (safety
nets) from government and also consider themselves as too -big -too fail. Boyd and
De Nicoló (2005) proclaimed in this regard that to set higher interest rates on loans

3
lower competition encourages banks to have higher market power, which boost the
borrower’s default risk, therefore increasing the information asymmetry and moral
hazard problems.

In order to solve the proclaimed conflict , Berger et al. (2009) and MMR
(2010) proclaimed that theory of competition stability and the theory of competition
fragility both were put in at the same time in the process of lending and that the
association among bank stability and competition was not resulted linear. In the
empirical literature no harmony has been seen yet whether the banking industry’s
stability or un stability is made by competition.

Financial crisis across the globe has pushed governments to improve

regulations in banking sector in recent decades. In regards to regulation of capital
additional risk can be taken by banks (Kim & Santomero, 1988). To reduce bank’s
risk taking conduct and to prevail sound and stable system, is the aim of banking
regulation (Repullo & Suarez, 2013), as banking instability will result in entire
financial system’s distortion because it will wrap both payment system and interbank
loan market and will shrink credit facilities (Khan, Ahmed, & Gee, 2016). So that,
financial stability is formed by the level of competition that is affected by banking
regulation.

1.2 Need of the Study

Banking sector in emerging economies has faced increased competition over

last two decades and their NPL ratios are also increasing as compared to developed
countries. The competitive pressures may induce the banks to take on excessive risk
in regard to boost bank’s profit, but in these economies, it may adversely affect the
banking sector’s stability. Thus, banks might adopt strategies in order to diversify
their portfolio and this may ultimately affect the bank stability. Thus, in emerging
economies there is a need arises to estimate the effect of competition, regulation and
diversification on listed banks.

In recent decades considerable deregulation and liberalization reforms have

been seen in Emerging economies (Meslier, Tacneng, & Tarazi, 2014). In those
countries the landscape of the financial sector has been changed by these reforms,
leading to stock market development and more competition in banks. therefore, to

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manage maximum returns banks diversified into non-lending activities, specifically in
non-interest income-generating services and non-interest-bearing assets.

Competition in banking is also a significant aspect of banks affecting the

stability (Shim, 2019). Therefore, the basis for this research are banking sector’s risk
taking, diversification and impact of competition of banking regulation.

The argument among policy makers and academics on the impact of

competition, banking regulation and diversification is still not resolved in developing
and emerging markets.

1.3 Problem Statement

Risk taking has been an important concern for banks as bank failures are
concerned with immense risk taking. A review of studies indicates that
diversification, competition and regulation are important determinants of bank risk
taking, but there is lack of enough support to analyze bank risk taking based on these
three factors together. Competition, regulation and diversification strategies may lead
to improve banks stability. However, these strategies are not being practiced properly,
in emerging countries it leads to minimize the bank’s financial stability. The present
study addresses this issue.

1.4 Research Questions

The current study seeks to answer question below.

 What is the impact of competition, banking regulation and diversification on
bank risk taking?

1.5 Objective of the Study

Current study looks over the impact of competition banking regulation and
diversification on risk taking of banking sector in Asian Emerging Economies. The
main objective of this study is:

 To examine in Asian Emerging Economies the impact of competition, banking

regulation and diversification on banks risk taking

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1.6 Significance .of this study

Present study has significant implications for emerging market regulators,

bank managers and policy makers which are in a process of liberalization and
increased global competitive market forces. This study, in particular, has major
implications from a regulatory point of view. The primary function of the regulators
of banking industry is to control the banking risk, facilitate effortless operations in
financial systems and protect depositors’ interests.

By diversifying the income, banks could generate different sources of income

that perfume significance role in profitability the profitability of banks. Still
diversification perform the important role in managing bank risk and effortless
operations in financial system. Diversification can be termed as a bank risk
management mechanism of risk reduction, as diversification shows the considerable
adverse effect on risk of banks.

1.7 Scope of the study

In this study we examine the impact of competition, banking regulation and

diversification on banks risk taking. Diversification is measured through income
diversification and assets diversification, Competition with Lerner index and H-
Statistics and regulation via CAR and Deposit insurance. While to measure Banks
Risk Taking, we used NPL ratio and Z-score. We have used the sample of 116 listed
banks operates in 10 Asian Emerging economies during the period of 2010 to 2018.
We have used Descriptive stats, Correlation analysis, Multicollinearity diagnostics
tests and Two Step Dynamic Panel System GMM technique to analyze the data in
order to control for endogeneity, heteroscedasticity and autocorrelation issues in the
data. Findings of our study suggest that banks get diversification benefits by
depending more on trading income and commission-based and fee income(non-
interest income activities). However, with respect to competition, our results also
support competition stability view according to which expansion in competition
increase banking sector stability and decreases banks risk taking. However, banks
risk taking, and deposit insurance are negatively associated with regulation,
moreover, results with CAR indicate opposite results.

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 CHAPTER NO 2

LITERATURE REVIEW

2.1 Theoretical Literature

2.1.1 Bank Risk Taking

Risk taking by banks has been an important concern for bank regulators. The
extent of bank risk-taking influences the chances of failure in banks and at macro-
level affects the banking sector’s sustainability. Bank risk is generally the banks’
possible loss due to the occurrence of events. Liquidity risk, market risk, interest rate
risk, operational risk and credit risk are key risks in banking. In banking sector, banks
risk-taking has been main theme in the literature and specifically banks behavior in
terms of risk and asymmetrical information. Greuning and Bratanovic (2009)
indicated that insolvency and credit risk are banks’ most significant risks.
Banks are urged to take excessive risk in the presence of information
asymmetry and limited capital. It is generally considered as the moral hazard issue, in
which one group to an agreement involves in activities that are harmful to the other
group. The issue is aggravated if deposit insurance exists. Government usually
presents banks with implicit and explicit deposit insurance in order to stabilize
financial system and boost the depositors’ confidence in the banking sector. Under
deposit insurance safety, the borrowers bear zero risk on their bank deposits. As a
consequence, lose motives to monitor bank transactions which incentivize banks to
take excessive risk taking. Researchers thus investigating the risk-based capital’s
effect on bank risk-taking with respect to moral hazard give emphasis to banks limited
liability and presence of the deposit insurance.
It is expected that the capital requirements tends to decrease risk-taking by
banks. Yet, under theory of moral hazard, the analysis does not always support this
argument. Several analysts to elaborate the effect of risk-based capital requirement on
banks risk taking relied on the franchise value theory . Franchise value in banking is
reffered to the net present value of the expected future profits of a bank. Banks have
nothing to protect in the absence of franchise value and thus no worry about
bankruptcy.

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 Extending from the literature on franchise value, capital buffer theory is
emerged, which shows behavior of banks under capital regulation. Consequently,
there are some implicit and explicit costs in altering capital levels. Implicit costs occur
from regulatory interventions to restrict the possibility of a deposit insurance, while
explicit costs relate to the constraints or sanctions imposed by regulators due to
inability to comply with both the minimum capital requirement and even liquidation.
Banks in order to reduce or avoid these costs have motives to keep a buffer of capital
higher than minimum threshold.
Risk-taking in banking sector may be triggered by a certain competitive
behavior or market power of banks. From the banking literature two approaches
emerge. According to the competition-fragility view, banks looked for additional
sources of income within a highly competitive environment and thus adopt more
aggressive risk-taking approach by making investment in riskier assets. Banks
involved in activities that offer them higher returns either to compensate their loss of
franchise value (Keeley, 1990; Marcus, 1984) or to maintain or improve their capital
reserves (Allen & Gale, 2004; Smith, De Nicoló, & Boyd, 2003).
There are no less numerous and less compelling arguments in favor of the
competition-stability model. Some studies proclaims that banks in a less competitive
markets are induced to lift their interest rates and thus making large amount riskier
loans (Boyd & De Nicoló, 2005; Caminal & Matutes, 2002). In fact, these banking
institutions are preferably to adopt a "too-big-to-fail" approach (Barth, Prabha, &
Swagel, 2012; Mishkin, 1999) that hampers banking sectors stability.
Banks’ riskiness is also intensified due to the financial institutions’
unwillingness to provide liquidity to their uncertain counterparts (Allen & Gale, 2000)
and to promote cooperation and assistance between interbank (Sáez & Shi, 2004).
Greater competition diminishes the amount of information that banks can accumulate
while making loans to borrowers (Hauswald & Marquez, 2006), thereby increasing
exposure to credit defaults.
Deyoung and Roland (2001) explain the sources of risk, which includes the
higher volatility in non-interest revenue, lower capital regulation and higher fixed
costs for banks engaged in additional business lines. Other reasons for increasing
risk include the higher agency problems, insufficient information about the product
market, lack of managerial skills (Acharya et al., 2006; Baele et al., 2007).

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 Banks risk taking is not only influenced by competition, there are some other
factors such as bank size, liquidity or growth among many other factors which can
impact the stability of banking sector.

2.1.2 Diversification
In finance, diversification refers to the process of allocating capital in a
manner that reduces the exposure to any particular asset. A common approach
towards diversification is to reduce uncertainty or risk by investing in different assets.
Diversification has been considered as a strategy which is very important for bank’s
financial performance and growth.

Internal capital market theory is considered being the important aspect which
leads firms to diversify. It allows firms to distribute capital in a more efficient manner
compared to external market (Williamson, 1973).The concept of agency theory is
presented by (Jensen & Meckling, 1976). From the perspective of diversification
strategy, agency cost may occur when management does not act in the interest of
firm’s shareholders. This is one of the reasons why firms opt for diversification
strategy (Amit & Livnat, 1988).

Diversification has both benefits and costs. Diversified entities faced

aggravated agency problems which may make diversification costly. In large bodies
it is difficult to align the interests of both insiders and outsiders may be the reason of
increased agency problem in diversified entities. If the expansion increases the
chances of insiders to obtain more benefits from the entity they surely choose to
diversify. Thus, even if diversification declines overall firms’ value, the insiders in
order to pursue self-interest would diversify activities (Amihud & Lev, 1981; Jensen
& Meckling, 1976). Another study by Laeven and Levine (2007) supporting this
view, reveal that less diversified entities’ market value is higher than that of highly
diversified financial conglomerates. In addition to credit risk, diversification may
reveal banks to other forms of risk, such as operational, liquidity and market risk.

Applied to the banking sector, portfolio theory implies that diversification may
possibly decrease chances of failure. Diversification can also decrease the cost of
providing appropriate incentive to banks to screen borrowers (Diamond, 1984).
Diversification through the economies of scale can benefit banks (Diamond, 1991).
The client’s information which banks obtained in advancing loans may be used in

9
providing services such as securities underwriting. Therefore, the efficiency of all
those entities enhances which are more involved in multiple activities.

Portfolio theory of diversification suggests that, banks obtain risk reduction

benefits if non-interest revenue sources are not correlated with interest revenue. In
contrast, if non-interest revenue sources are riskier and highly correlated with interest
income banks face higher risk.

Portfolio theory also suggests that banks are able to reduce their exposure
either by diversifying their income sources or by diversifying assets into different
geographic areas. Reed and Luffman (1986) explain that the concept of diversification
has different explanations, especially when research work is concerned. According to
Qureshi, Akhtar and Imdadullah (2012), diversification is the way of entering in the
other markets. It can be divided into product diversification and geographic
diversification. Regarding product diversification, Su and Tsang (2015) describe
product diversification as the situation where firms are operating in more than one
market or more than one industry.

Another type of diversification strategy is geographical diversification. When

firms deal in more than one geographic area, it is said that the firm is geographically
diversified. Lee and Kwok (1988) explain geographic diversification as the number of
countries in which a firm is operating. Geographic diversification occurs when a firm
deal in more than one country (Qureshi et al., 2012).

2.1.3 Competition
A basic theory of banking competition is that intensified competition between
banks may endanger the institutional stability and fetter overall banking sector
stability. Such competition by decreasing the banks’ franchise value may induce
banks to engage in riskier policies to maintain its previous profits. Lowering capital
levels and increasing credit risk of loan portfolio are example of riskier policies. Such
riskier policies lead to bank failure due to greater chances of increasing npl ratios. On
the contrary, restricted competition could induce banks through more stable policies
to safeguard their FV (franchise value) that lead to the stability of the banking sector
as a whole.

The traditional view of competition argues that intense competition aggravates

individual banks’ risk-taking behavior and makes them vulnerable (Keeley, 1990;
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Marcus, 1984). Hellmann, Murdock and Stiglitz (2000) as supporters of this view
declared that banks under monopolistic markets earn monopoly rents, enjoy greater
FV (franchise values) and develop a safety cushion against crisis, thereby compelling
banks take lower risk. Nonetheless, Keeley (1990) argued that within loan market,
competition is created by deregulation that deteriorate the banks FV (franchise values)
in order to gain monopoly rents therefore leads banks to take more risks in order to
regain lost franchise value and maximize returns.

Additionally, Allen and Gale (2000) argued that monitoring in a monopolistic

market is simpler when there are relatively fewer banks. They also declared that all
banks in a competitive market were price takers and none had an incentive to provide
liquidity to support a bank in distress. Likewise, Allen and Gale (2004) declared that
less concentrated and highly competitive markets are likely to experience financial
distress due to unavailability of large size banks that generate higher profits by
providing highly valuable financial products which they can used as a capital buffer
against potential financial distress or decline in assets quality.

On the contrary, risk- shifting or competition-stability model reveals that the

less competition may also worsen the banks risk-taking behavior (Boyd & De Nicoló,
2005; Schaeck & Cihák, 2014). They declared that less competition permits banks to
charge their borrower high interest rates. They further stated that banks with high
market power hold capital buffer by earning higher profits which they can used
against macroeconomic and liquidity shocks. Thus, stability of large banks can be
improved under concentrated markets. Moreover, large banks often receive
government subsidies, which they consider to be too big to fail, aggravating their risk-
taking behavior (Acharya & Naqvi, 2012).

To resolve competition-fragility and stability views, Berger et al. (2009)

indicated that competition-instability and competitiveness-stability beliefs did not
anticipate opposing results; rather, these both views were true simultaneously if
increase in risk-taking by banks was eliminated by the use of extra capital reserves,
achieved by interventions e.g. credit derivatives and lower (IR) interest rate risk.
More recently, MMR (2010) indicated that the association among competition and
bank stability was nonlinear, because banks and borrowers’ risk-taking is not
perfectly associated.

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 MMR (2010) extend the BDN (2005) view through the implementation of
imperfect correlations between borrowing firms. The BDN’s "risk-shifting" effect,
represents the consequence that intensified competition among banks results in
lowering loan rates, lessen the probabilities of banks’ default and improves stability of
banks. The lower rates, however, decreases interest payments by all firms and
therefore overall bank profits, which would eventually result in increased bank
failures. Authors defined it as “margin” affect. A U-shaped association among bank
competition and bank failure risk is found in the MMR view to capture the net effect
of those two forces. In  concentrated markets, risk shifting effect dominates while the
margin affects dominates in competitive environment.

2.1.4 Regulation
Capital regulation is expected to enhance the stability of the banking sector by
applying mandatory capital buffers against unanticipated losses. Kahane (1977)
describes the Markowitz literature with a two-dimensional portfolio view and states
that likelihood of banks failures increases as a result of more stringent capital
regulation. Jacques and Nigro (1997) reveal that there was huge effect of risk-based
capital ratio on banks’ capital and risk levels. Van Roy (2011) claims that the efficacy
of capital regulation seems to depend on the ability of the regulator to establish capital
requirements and reduce moral hazards.

There was found to have mixed effect of capital regulation in European

countries perspective. Ediz, Michael and Perraudin (2011) and Rime (2001) find out
that British and Swiss banks are raising their capital ratios by maintaining level of
risk. Lepetit et al. (2008) discover riskier institutions to reflect lower capital ratios and
explains that more the capital amount closer to the regulatory minimum, the concern
is that managers may ‘play for survival’ by investing in riskier assets which can be
funded by boosting capital. Banks with high capitalization can be encouraged to boost
non-traditional practices if they have bigger cushions of capital (Lehar, 2005).

One of the measures of regulation is deposits insurance which boosts financial

safety net for depositors in a constructive way, improves financial stability and
intermediation and promise the safety and protection of depositors’ deposits. In a
banking sector, the deposit insurance system is primarily introduced to avoid bank

12
runs that could spill over to other banks (Diamond & Dybvig, 1983), improve
financial stability and prevent crisis (Demirgüç-Kunt & Detragiache, 2002).

Deposits insurance increases the trust of depositors in the banking sector by

protecting banks against the risk associated with early funds withdrawal due to
banking sector panic. Therefore, deposit insurance which is backed by government
effectively facilitates banks stability by reducing the possibility of bank failures. Even
during crisis period, the deposit insurance schemes performs as a risk minimizing tool
by protecting main depositors’ deposits.

Merton (1977) and Keeley (1990) in their theoretical evidences indicated that
deposit insurance might lead to moral hazard issue. Under the public safety net, the
existence of deposits insurance helps protects the depositors against failures of the
banks. Therefore, they find no reason to control or regulate the banks’ risk-taking
incentive. Within this scenario, if the banks have awareness of the relaxed attitude of
the depositors to monitor the bank’s activities, the risk of the contract would be
changed as banks might involves in riskier activities. As a consequence, the bank’s
moral hazard is increased by gambling and taking on additional risk by investing in
riskier projects to reap higher returns. Therefore, the advantages of deposit insurance
can be compensated by the worsening of the moral hazard effect. Empirical evidence,
however, indicates a reliably structured deposit insurance could mitigate the impact of
moral hazard (Demirgüç-Kunt & Huizinga, 2004), and improves financial
intermediation (Chernykh & Cole, 2011).

2.2 Empirical Literature

2.2.1 Diversification and risk taking

An extensive literature has emerged exploring the diversification and stability
relationship. One strand of literature discovers that diversification is positively linked
with banks stability and profitability. The evidence is that diversification decreases
the likelihood of financial distress by reducing concentration of risk. It can be
accomplished by widening operations both geographically and across various
products and services (Baele et al., 2007; Berger, Demsetz, & Strahan, 1999; Rose,
1989).

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 Amidu and Wolfe (2013) and Nguyen et al. (2012) in their respective studies
concluded that diversification strategies enhances stability of banking sector.
According to Iskandar-Datta and McLaughlin (2007), diversification helps financial
institutions to benefit from efficient use of managerial skills, greater efficiency and
cheaper supervision (Boyd & Prescott, 1986). Deng, Elyasian and Jia (2013) used
sample of US banks from 1994-2009 to analyze the features of diversification and
finds positive impact of larger institutional ownership on diversification which in turn
helps lowering risk. Abedifar, Molyneux and Tarazi (2018) also explore the
relationship between non-interest income sources and credit risk by incorporating
sample of U.S banks and their finding suggests inconsistent relation between these
two except for smaller banks which involved heavily in prudential activities which
tend to reduce credit risk.

Unlike the previous literature, a number of other studies reach at the opposite
conclusion that bank diversification is associated with extensive risk taking by banks.
Demsetz and Strahan (1997) and Deyoung and Roland (2001) in their studies discover
that revenues of banks becomes more volatile with increase in banks non-interest
income sources and show that large banks maintain lower capital ratios, hold larger
loan portfolios that are more involved in derivative market. Likewise, Acharya et al.
(2006) associate higher non-interest income with bad performance as diversification
decreases incentives of banks to monitor loan (that leads to poor quality loan
portfolios and decline in profits). A study is conducted on German banks during 1996
to 2002 by Hayden, Porath and Westernhagen (2007) to explore the impact of
portfolio diversification on risk and it was found to decline returns. Stiroh and
Rumble (2006) in their study aimed to find out connection between diversification,
risk-taking and profitability of bank holding companies in US perspective. Their
analysis show that non-interest based activities not only enhances profitability but
also exacerbates risk. Lepetit et al. (2008) conducted a study on European banks to
analyze impact of product diversification on banks risk taking during 1996-2002 and
their results indicate that expanding non-interest income activities leads to higher
banks credit risks.

Chiorazzo, Milani and Salvini (2008) while considering revenue

diversification conclude that due to the unstable nature of non-interest income
activities, they are usually linked with profitability gains but also results in excessive

14
risk. Baele et al. (2007) and Campa and Kedia (2002), concluded net diversification
benefits are associated with increased stability of banking. Laeven and Levine (2007)
and Mercieca, Schaeck and Wolfe (2007), in their studies declared that diversification
benefits offsets with its cost mainly due to over expansion into industries where lack
of expertise and higher competition prevails, diversification can decrease risk-
adjusted performance. Goddard, McKillop and Wilson (2008) found it to be true
particularly for small banks.

Deng and Elyasiani (2008) provide empirical evidence on geographic

diversification and conclude that geographic diversification is linked with value
enhancement of banks through risk reduction. In addition, they also find that more the
distance between banks headquarters and its branches, value of the firm declines and
risk increases. In terms of geographic diversity, Goetz, Laeven and Levine (2013)
conclude that increases in geographic diversity is associated with reduction in BHC
value consistently.

Brighi and Venturelli (2016) explore the effect of geographic and functional
diversification on performance of banks by using sample of 491 Italian banks during
2008’s financial and 2010’s sovereign debt crises. In both cases profitability of bank
declines. However, during 2008’s crisis risk of Italian banks stays unaffected, but
such risk intensified during sovereign debt crisis.

By incorporating data of Australian banks from 1987-2004, Williams and

Prather (2010) investigates the impact of diversification in risk and return of banks
and conclude that fee-based income is riskier than the income obtain through interest
margins, even though diversification enhances shareholder returns. Using same
sample of Australian banks during 2000-2009, Delpachitra and Lester (2013) found
similar results that revenue and income diversification does not enhance profits or
reduce exposure to risks. Combined with traditional intermediation, Williams (2016)
for Australian banks finds that non-interest activities generally lead to higher systemic
risk.

Lee et al. (2014) using sample of Asian countries find that diversification
does not increase banks profits but reduces risk. Following are some studies that
reports high involvement in noninterest based activities with improvement in
performance of banks and their risk-adjusted profits (Meslier et al., 2014; Pennathur

15
et al., 2012; Sanya & Wolfe, 2011). Hsieh et al. (2013) examines diversification
issues for the same countries during 2004 to 2009 and conclude that bank asset
diversification is insufficient to improve stability of banks.

Maudos and Solís (2009) shed light on association between non-interest

revenue and net interest margins in perspective of Mexican banks. Hidayat et al.
(2012) investigate the link between product diversification and bank risk
incorporating sample of Indonesian banks and indicate that the impact of
diversification on bank risk depends on bank size. Batten and Vo (2016) indicate that
banks with more involvement in nontraditional activities face higher risk by using
sample of Vietnamese banks . Berger, Hasan and Zhou (2010) for the period of 1996-
2006, investigate panel data of 88 Chinese banks and conclude that diversification
lead to reduced profits and increase risk.

2.2.2 Competition and risk taking

Over the few decades, there is outgoing debate among academics and policy
makers regarding the connection between competition and risk-taking in the banking
sector throughout the world. However empirically, evidences concerning this
relationship are mixed and inconclusive to some extent. Keeley (1990) was the first
who measure bank competition with during 1980s revealed that competition resulted a
decline in banks risk taking and is in line with the franchise value hypothesis.

Empirical evidence in term of country-specific literature of Spain, Salas et al.

(2003) explores significant association among the competition and banks risk-taking.
On the whole, increase in competition brought opposite effect of franchise value
hypothesis. A study of Beck et al. (2006) on bank crisis during 1980-1997 by using a
sample of 69 countries concluded that high concentration was not linked with
probability of banking crisis. comparatively, it boosted banks stability and thus show
support for competition-fragility view. Although, Dick (2006) reveals significant
positive association between deregulation in banks and increases in loan losses.
According to Jiménez et al. (2007), negative association was present between
competition when measured with Lerner index and banks risk taking in Spain.

Yeyati and Micco (2007) shed light on competition and risk tradeoff using
sample of banks in eight Latin American countries and indicate that more competition
among banks exacerbates bank risk, showing support for the “competition-fragility”

16
view. Turk Ariss (2010) by using a developing countries sample during the period of
1999-2005 finds that although banks with greater market power causes banks to take
excessive risk and improves banks profit efficiency, the banks cost efficiency will
decline.

Although “franchise value” hypothesis has extensive support in literature,

Boyd and De Nicoló (2005) give some empirical evidences of cross country analysis
that are in line with “competition-stability” view. They incorporated different bank
level measures of competition for sample of US banks. They observe significant
negative association between bank competition (when measured with HHI) and bank
risk-taking (measured by z-score) indicating that less competitive/more concentrated
banking sector are exposed to greater risk of failures. De Nicoló and Loukoianova
(2007) additionally, by considering bank ownership observe empirical support for
competition-stability hypothesis.

Berger, Klapper and Turk-Ariss (2009) highlighted both “competition-

fragility” view and “competition-stability” view. The results of their analysis indicate
that banks which have greater market power have lower overall risk and in line with
the “competition-fragility” view. However, their results also reveal supports for the
“competition-stability” view, suggesting that greater banks market power leads to an
increase in non-performing loans and higher capital ratios partially offset this risk.

While exploring the linearity of relationship between competition and stability

in Spanish banks for period 1988–2003, Jiménez et al. (2013) provided evidence in
favor of the competition- fragility view, although insignificant relationship was found
between concentration and banks risk-taking. Craig and Dinger (2013) in their study
incorporated sample of 581 U.S. banks from 1997 - 2006, and found that the banks
with low market power usually preferred to take more risk. Beck et al. (2013) found
heterogeneous association between competition and stability of banks by analyzing
data of total 17,055 banks operates in 79 countries during 1994–2009. This
relationship is mainly due to the moderating role offered by institutional and
regulatory factors. Their findings also indicate that countries with strict restrictions on
activity, better developed stock exchange, lower systematic fragility, substantial
deposit insurance and efficient credit information sharing system, greater competition
resulted in more fragile banking system.

17
 In addition, Cubillas and González (2014) observed that increase in
competition is negatively associated with stability of banks using 4,333 banks
operates in 83 developed and emerging economies during 1991-2007. Kasman and
Kasman (2015) in their study on Turkey’s banks noticed that during 2002–2012,
competition and concentration both decreased banks stability and increase credit risk.
Their analysis, however, have found no support for a non-linear relationship between
them. For the first time, Kabir and Worthington (2017) in their recent study observed
positive association between market power and stability of Islamic and conventional
banks operates in 16 emerging economies during 2000–2012. However, findings
indicate greater impact of market power on stability of conventional banks. Leroy and
Lucotte (2017) conducted the study on European banks during 2004–2013 and
revealed that competition encouraged banks to take excessive risk. It nevertheless
continued to foster financial stability by reducing the banks’ exposure to systemic
risk.

2.2.3 Regulation and Risk taking

Shrieves and Dahl (1992) found that capital and risk are positively related.
They have evolved a simultaneous equation model to examine the capital behavior of
US banks. In the other way around, Jacques and Nigro (1997), found a negative
association between capital regulation and risk level using the similar methodology
for US commercial banks. In contrast, Rime (2001) explored the alterations in swiss
banks’ capital and risk and concluded that regulatory pressure in swiss banks
positively impact capital ratio, but insignificantly impact risk-taking behavior of
banks. In general, Swiss banks enhance their capital ratio by raising capital through
equity issue or retained earnings not by reducing their risk-taking .

A study in context of emerging economies is conducted by Godlewski (2005)

who examines the impact of bank capital on risk. The study by using (Shrieves &
Dahl, 1992) simultaneous equation model indicates similar outcomes in case of
industrial economies such as US and UK. The study identifies the significance of
legal, institutional and regulatory factors in running a stable financial system.

A study is conducted by Altunbas et al. (2007) on European banks during

1992-2000 to examine the impact of capital on banks risk and efficiency. The study
finds that capital and liquidity are positively related to risk and further indicate that

18
inefficient banks take less risk but hold more capital. It also shows preference of
regulators for capital in order to restrict banks risk-taking incentives. Van Roy (2008)
conducted study on six G10 countries which indicates that there is no difference
between under capitalized banks and well-capitalized banks when it comes to
changing the ratio of risk-weighted assets to total assets.

In contrast, Jokipii and Milne (2011) discover that capital and risk are
positively associated in highly capitalized banks while undercapitalized banks are
found to have negative capital-buffer-risk relationship. It was also found that highly
liquidate banks can reduce their capital and boost their risk levels, as the higher
liquidity serves as banks’ self-insurance against the liquidity shocks. Athanasoglou
(2012) conducted a study on south eastern Europe after the 2008 financial crisis to
explore association of banks’ choice of equity or regulatory capital and risk. The
study reveals a direct connection between regulatory capital and risk, but negative
association between equity capital and risk. Although, Lindquist (2004) using sample
of banks in Norway finds negative association capital and risk.

A substantial empirical literature observed the impact of deposit insurance in

minimizing moral hazard. Martinez-Miera and Repullo (2010) indicated that deposit
insurance increases banks profitability and enhances financial stability of banks.
Banks are required to offer depositors with high deposits rate in the absence of deposit
insurance which in turn raise interest rate on loans and thus increase probability of
failure. However, Anginer and Demirguc-Kunt (2014) while estimating the
probability of failure during GFC of 2008-2009 revealed that the countries with
explicit deposit insurance were more stable and had lower bank risk. In addition, Assa
and Okhrati (2018) also concluded the negative association between deposit insurance
and moral hazard of banks.

2.2.4 Bank Size and Risk taking

Substantial literature has emerged examining the link between bank size and
banks risk taking. According to Saunders et al. (1990), increase in banks size resulted
in reducing banks risk taking. On the contrary, González (2005) is among those who
found a positive association between size and banks risk-taking and in line with the
argument of “too-big-to-fail”, showing that large banks incentivized to involve in
risky investments due to the benefits of a comprehensive security net they possesses.

19
 According to Stiroh (2006), larger banks carries less risk. Moreover, Galloway
et al. (1997) and Saunders et al. (1990) in their studies show that larger banks under
the “too-big-to-fail” theory obtain regulatory protection. In general, larger size banks
are incentivized to take more risks than smaller size banks. Such banks have huge
potential for diversification and risk reduction. Also, they might be more vulnerable to
market movements than those of small size.

2.2.5 Leverage and Risk taking

According to Duffie (2010), It is widely understood that the Global Financial
Crisis occurred due to excessive risk taking by highly levered financial institutions. In
this study they depict a close link between leverage and banks risk taking. The
reasons to take on excessive risk depend on the speculator's leverage, for the obvious
reason that firm size influences the risk-taking returns. The conclusion is simply that
leverage must be controlled in order to restrict risk taking. Mainly in the financial
institution’s perspective, these findings provide basis for firms’ equity requirements.
It differ from the traditional theory that equity capital is needed to curb economic
downtown and to absorbs adverse shocks (Bonaccorsi et al., 2015). Diamond and
Rajan (2000) challenged this view and found that instead, equity requirements are
compulsory to give incentives to potential speculator and to control risk–taking.

In a series of papers in perspective of individual firms, author provides the

support for view that less leverage results in lower fragility, more systemic resilience
and lower subsidies (Admati, 2015). In that context, leverage intensifies the transfer
of shocks and the magnitude of crises. Another study concluded that low levered
institutions take less risk taking thus ensures stability of financial sector. Furlong and
Keeley (1989) found that increase in banks capitalization decreases asset risk.

2.2.6 Liquidity and Risk taking

In the view of the microeconomic classical theories of banking there was a
close link between liquidity and credit risks. According to the industrial organization
models in Europe and America, the framework of Monti-Klein for banking and
Bryant (1980) and Diamond and Dybvig (1983) view in the financial intermediation
perspective indicate a close connection between assets and liability structures of
banks, specifically, considering borrower defaults and rapid fund withdrawals. Banks
usually by financing in risky project create liquidity in the economy during financial

20
intermediation and concluded that bank difficulties intensified during crisis due to
exposure to credit and liquidity risks at the same time.

Louati et al. (2015) using sample of conventional and Islamic banks operates
in 12 South Asian and MENA countries during 2005-2012 found negative association
among liquidity ratio and credit risk of conventional banks. A study by Laidroo
(2016) analyze the comparison between the loan growth of foreign-owned banks and
domestic privately-owned banks. By using data of central and eastern Europe over
the period of 2004-2012, concludes that bank capital significantly influencing private
domestic owned banks in the absences of crisis, on the other hand bank liquidity is
important for private domestic banks in the presence of crisis.

2.2.7 Growth and Risk taking

Köhler (2012) using sample of 15 European countries examine the relationship
of business model and loan growth with banks risk taking and found that higher loan
growth rate makes banks more risky. On the basis of analysis, they further found that
if there is excessive credit growth at an aggregate level banks become more risky.
Even the banks in which loan growth rate is not as much high in comparison with
their competitors also affected by it.

Another study by Amador et al. (2013) examines the association between

abnormal loan growth and risk-taking by banks. They found that banks increase their
risk taking when abnormal loan growth continued for longer period of time. Thus,
leads to increase insolvency and non-performing loans ratio.

2.2.8 GDP and Risk taking

One of the studies on Kenyan commercial banks analyses how the financial
inclusion affected credit risk while taking GDP effect as moderation. Bank
availability, usage and accessibility were the three dimensions used for measurement
of financial inclusion, while NPL ratio was used as measured of banks credit risk.
Commercial banks in emerging economies like Kenya, remain the dominant mean of
financial intermediation. Stability of commercial banks is the prerequisite for them to
efficiently and effectively perform intermediation role by providing liquidity.
It is expected that favorable macroeconomic conditions will enhance financial
inclusion. According to Adusei (2015), higher level of savings depicted in financial
accounts were because of higher earnings. Honohan (2008) analyzed that increase in

21
financial inclusion resulted in development of economy and explores whether its
impact remains significant after controlling for inflation and GDP. Kosmidou (2008)
stated that GDP growth increases stability by enhancing profitability. Since GDP
growth is correlated with a general improvement in an economy's income and thus a
rise in financial inclusion.
However, Tan and Floros (2012) found that GDP growth is negatively related
with banks profitability which in turn have negative impact on stability. It was due to
the fact that rapid increase in economic growth in turn results in lowering banks
barrier to entry and thus intensified competition. Banks profitability declines as a
result of intensified competition which further leads to reduction in banking sector
stability.

2.2.9 Inflation and Risk taking

There was significant effect of inflation on banks under various perspectives.
At first, inflation has an impact on bank lending. Boyd and Champ (2006) argue that
countries where the inflation level is high normally have small equity markets, ration
loans decreases the overall amount of loan issued by banks particularly to private
sector. Secondly, Boyd and Champ (2006) find that inflation also affected banks
profitability and negative association exists between them under the assumption that
banks may not know that inflation is on rise.

Another study is conducted on china to analyze how inflation affected the

profitability of Chinese bank. The findings of their analysis indicate that lower
volume of investments in non-traditional activities, developed stock market and
banking sector, low taxes and higher inflation explains banks profitability in china.
They also indicate that profitability appeared to continue on average extent, that
concludes that variations from a perfectly competitive market dynamics in Chinese
banking sector might not be that great.

2.2.10 Interest rate and Risk taking

The monetary policy’s risk-taking approach, which is also view as the link
among short-term interest rates and banks risk taking regained debate after the global
financial crisis– the idea that interest rate policy affects not just the quantity but also
the quality of bank credit. According to Taylor (2011), interest rates were held very
low for long period just before crisis and this aid a boom in asset prices, stimulating

22
financial intermediaries to not only increase leverage but also to take on excessive
risks (Adrian & Shin, 2009; Borio & Zhu, 2012). Theory provides contradictory
interpretations of the relationship among the real interest rate and risk-taking by
banks. According to Chodorow-Reich (2014), there is ambiguous impact on the
riskiness of investment pool. For limited scale investment projects, an increase in risk-
free rate raises the investments hurdle rate and convinces agents to cut low return /
high risk projects.

On the other hand, the monetary policy’s risk-shifting approach predicts that
increase in interest rates is associated with increase in banks risk taking. The
asymmetric information among banks and their debtors in these models prevents bank
depositors from pricing risk at margin. This in addition with limited liability guides
banks to take more risk. Consequently, banks will have to pay increased deposits
interest rates which will intensify the agency problem linked with inefficiency and
limited liability raise risk taking by banks. Stiglitz and Weiss (1981) concluded that
banks are exposed to severe agency problem when the interest rates are increasing
while their intermediation margins are flattened. Thus, the banks which are least
capitalized under risk-shifting models are found to be most vulnerable to the changes
in interest rate. However, the association among the interest rate and risk taking is
contrary to effect of portfolio allocation and they partly offset each other in the
models that considers both of them (Dell’Ariccia, Laeven, & Marquez, 2014).

2.3 Hypotheses Statements

H1:Diversification has significant impact on bank risk taking.

H2:Competition has significant impact on bank risk taking

H3: Regulation significantly affects bank risk taking.

H4:Bank size significantly affects bank risk taking.

H5:Leverage significantly affects bank risk taking.

H6:Liquidity significantly affects bank risk taking.

H7:Growth significantly affects bank risk taking.

H8:GDP significantly affects bank risk taking.

23
 H9:Inflation significantly affects bank risk taking.

H10:Interest rate significantly affects bank risk taking.

2.3 Summary of Literature

Overall findings of the literature indicate that there was negative as well as
positive impact of diversification, competition and regulation on banks risk taking.
Negative relationship was found between income diversification and banks risk taking
in most of the studies concerning impact of diversification on banks risk taking.
however, there were some studies who found positive relationship between
diversification and risk taking. Studies considering competition reached to different
conclusions and were supported by competition-stability and competition fragility
view. Some studies found non-linear relationship between competition and risk
taking. Regulation was found to be positively and negatively associated with banks
risk taking. Findings of the literature also indicate that there was significant
relationship between control variables and banks risk taking.

24
 CHAPTER NO 3

METHODOLOGY

3.1 Research Design

The research design is the process in which the type of study, questions and
hypotheses of the research, variables and method of collecting the data are included.
Type of our research is secondary deductive, and we use quantitative data collection
technique for collecting variables data to examine impact of diversification,
competition and banks regulation on banks risk taking in Asian Emerging Economies.

3.2 Methodological Literature

Abuzayed et al. (2018) examined the effect of diversification on banks

stability and used GMM techniques towards data analysis for examinning listed and
unlisted islamic and conventional banks operates in GCC countries during 2001-2014.
Brighi and Venturelli (2014) analyzed the impact of revenue diversification on
performance of banks and used fixed effect regression to analyse panel data of 52
Italian Bank Holding Companies for the period of 2006-2011. Chen, Liang and Yu
(2018) used dynamic panel (GMM) model technique toward data analysis to explore
the impact of asset diversification on performance of dual banks using sample of
Asian countries over 2006-2012. Huq, Gupta and Zheng (2018) conducted a study on
the effect of diversification on bank performance and risk taking using sample data
from five Asian countries for the period of 2011 to 2015 and used dynamic panel
GMM.

Meslier et al. (2014) examines how bank revenue diversification affect the
banks performance in philippines using sample of 39 commercial banks from1999 to
2005 and apply two-way fixed-effects panel regression toward data analysis.Sanya
and Wolfe (2011) using emerging economies listed banks sample investigates impacts
of revenue diversification on banks risk and performance using GMM technique.
AlKhouri and Arouri (2019) conducted study on six GCC markets using sample of
69 listed Islmaic and Conventional banks during 2003–2015 to investigate the affect
of revenue diversification, non-interest income and asset diversification on the
performance and stability and used the System GMM methodology.Moudud-Ul-Huq

25
(2019) examines how diversification effect banks risk taking and performance by
using panel data of 1397 banks operating in Brics-5 and Asean-5 region during 2007
to 2015 and used dynamic panel generalized method of moments (GMM) for data
analysis and for validation of the results they have incorporated two-stage least
squares (2SLS).

3.3 Data

We analyze the impact of diversification, competition and regulation on banks

risk taking by extracting data from financial statements of listed banks operating in
Asian Emerging Economies and Global Financial Development Database (GFDD) for
the period of 2010 to 2018. The macroeconomic data are extracted from the World
Development Indicators (WDI) database.

Table 3.1: Sample Description

Countries Total No. of Listed Banks Selected
China 19 7
India 38 20
Indonesia 43 17
Lebanon 6 6
Malaysia 10 8
Pakistan 37 20
Philippines 18 18
Thailand 17 12
Turkey 16 8
Vietnam 11 3
Total number of listed banks in these 10 Asian Emerging Economies are 215. We
have selected the sample of 116 listed banks based on the availability of data. We do
not have access to financial statements of many banks and some of the reports are
found to be in other languages. Sample period of our study is 2010-2018. We have
chosen after crisis period to analyze the impact of diversification, competition and
regulation on banks risk taking.

3.4 Statistics

Banks Risk taking is dependent variable while Diversification, Competition

and Banks Regulation are independent variables in this study. Control variables used
in the study are liquidity, leverage, bank size, growth, inflation, interest rates and
GDP. All these variables are described below.

26
3.4.1 Diversification Measures
Diversification is measured with following proxies: Income diversification and
Assets diversification.

3.4.1.1 Income diversification

We measure diversification with Income diversification (ID) following
(Meslier et al., 2014; Stiroh & Rumble, 2006; Williams, 2016). Income diversification
is defined as the ratio of non-interest income to total operating income, where non-
interest income consists of fee-based income and commission and other non-interest
income whereas operating income is the sum of net interest income and non-interest
income.

3.4.1.2 Assets diversification

Assets diversification (AD) is other measure of diversification we use in our

study following (Edirisuriya et al., 2015). Assets diversification is calculated by
dividing the non-interest-bearing assets to total assets where non-interest-bearing
assets equal bank total assets minus total loans and advances.

3.4.2 Competition Measure

We have incorporated two measures of competition in our study. Lerner index
and H-Statistics.

3.4.2.1 Lerner Index

The Lerner index (LERNER), is a measure of banking market power. It is
characterized as the differential between the output and the marginal costs. Prices are
computed as total bank revenue over assets, while marginal costs are acquired with
respect to output from an estimated translog cost function. Lerner index higher values
show less competition from the banks.

Lerner index is calculated as follows:

Lerner it = (PTA it – MCTA it)/ PTA it

where PTA it is the price of total assets i at time t, and MC TA it is the marginal cost of
total assets for bank i at time t.

27
3.4.2.2 H-statistic
An estimate of the extent of banking market competition. This calculates
Banks revenue elasticity relative to input costs. A rise in commodity prices increases
all marginal costs and total revenues by the same amount under perfect competition,
and hence the H-statistics equals 1. Under a monopoly, an increase in input prices
leads to an increase in marginal costs, a decrease in output, and a decrease in
revenues, resulting in an H-statistics of less than or equal to 0.

3.4.3 Regulation Measures

In our study, we have used two measures of regulation, CAR and deposits
insurance.

3.4.3.1 Capital Asset Ratio (CAR)

The present study used CAR as measure of regulation and is defined as:

CAR = (Tier 1 capital + Tier 2 capital)

(Risk weighted assets )

3.4.3.2 Deposits Insurance (DI)

Following Fu et al. (2014) and Anginer et al. (2014), we have included a
dummy variable in our study to capture the deposit insurance coverage, indicating the
presence of deposit insurance in a country. It takes value one if deposit insurance
scheme exists in a country and otherwise, zero.

3.4.4 Bank Risk taking Measures

We have used two measures of bank risk taking, Z-Score and NPL ratio
(Amidu & Wolfe, 2013 ; Köhler, 2014).

3.4.4.1 Z-Score
The Z-Score is extensively used as an indicator of bank stability in the
literature. It measures the number of returns of standard deviations must lessen before
a bank becomes insolvent (Stiroh & Rumble, 2006).

The Z-score is calculated as follows:

Z = (ROA + E/A )/ σ ROA

28
 where ROA is the return on assets, E/A is equity divided by total assets and σ ROA is
the standard deviation of the return on assets. Although the Z-Score values are
strongly biased, we are using the Z-Score’s natural log which is normally distributed.
In the rest of the study we use the Z-Score symbol for reference to the Z-Score’s
natural log.

3.4.4.2 Non-Performing Loans Ratio

Following Abedifar et al. (2013), NPL Ratio is used as a measure of bank risk.
It is defined as the ratio of non-performing loans to gross loans and indicates the level
of expected losses. A higher value of NPL ratio indicates higher probability of bank
defaults and vice versa.

3.4.5 Control Variables

3.4.5.1 Bank-specific variables
Following (Köhler, 2014) we use number of bank specific control variables in
our analysis. These variables include bank size, assets growth, leverage and liquidity.
Following Lepetit et al. (2008), we control for bank size which is calculated by taking
the natural log of total assets. It is estimated that larger banks tend to be more stable
as they have a greater opportunity to diversify income source. Leverage is calculated
as the equity divided by total assets ratio. A higher level of leverage suggests greater
stability (Lepetit et al., 2008). Liquidity is calculated as deposits divided by total
assets ratio which represents the banks level of liquidity and it is expected to have a
positive impact on stability of banks (Wagner, 2007).

Asset growth (Gw) is another control variable included in the present study.
On the one hand, asset growth can worsen moral hazard and asymmetric information
issues if banks relax their criteria for loan screening when they grow rapidly, and such
asset growth can result in higher credit and bankruptcy risk (Abedifar et al. 2018). In
comparison, faster growth may indicate increased opportunities for investment and
diversification which may result in lower risk.

Table 3.2 Variables Summary

Sr No. Abbr. Name Description Source

1 ZS Z-score Z = ROA+ E/A)/ σ ROA Laeven & Levine (2009)
Non-performing Ratio of Non-Performing Loans
2 NPL loans ratio to Gross Loans Abedifar et al. (2013);
3 ID Income Ratio of Non-Interest Income to Meslier et al. (2014)

29
 Stiroh and Rumble
Diversification Total Operating Income (2006)
Asset Ratio of Non-Interest-Bearing
4 AD Diversification Assets to Total Assets. Edirisuriya et al. (2015)
Demirguc-Kunt and
5 Ler Lerner Index Lerner = (PTA – MCTA)/ PTA Martinez Peria (2010)
Elasticity of Banks Revenues Moch (2013)
6 HS H-Statistics Relative to Input Prices Noman et al. (2017)
Capital Asset (Tier1 Capital +Tier2 Capital)
7 CAR Ratio Risk Weighted Assets Maji and De (2015)
Deposits Dummy variable takes one if Anginer et al. (2014)
8 DI Insurance DI is present otherwise, zero Fu et al. (2014)
9 Lev Leverage Equity to Total assets Ratio Lepetit et al. (2008)
10 Liq Liquidity Deposits to Total Assets Ratio Wagner (2007)
11 Size Size Natural Log of Total Assets Lepetit et al. (2008)
12 Gw Growth Annual Change in Total Assets Abedifar et al. (2018)
13 IR Interest Rate Deposits Interest Rate Nguyen et al. (2012)
Percentage Change in Consumer Amidu and Wolfe
14 Inf Inflation Rate Price Index. (2013)
GDP Growth
15 GDP Rate Annual GDP Growth Rate AlKhouri et al. (2019)

3.4.5.2 Macroeconomic variables

Macroeconomic factors can also affect the stability of banks. Following
Nguyen et al., (2012), we include some of macro variables in our analysis such as
GDP, inflation and interest rate.

3.5 Mathematical Equation or Econometric Model

( BR ) i , t=α + β 1 ( ¿ ) i ,t + β 2 ( Comp ) i ,t + β 3 ( Reg ) i, t+ γ 1 ( Lev ) i ,t +γ 2 ( Liq ) i , t+ γ 3 ¿(3.1)

Where BR denotes Risk taking which is our dependent variable. Div, Comp and Reg
are independent variables in our model, Where Div stands for diversification, Comp
and Reg means competition and regulation. Leverage(Lev), Liquidity(Liq), Bank
Size(size) and Growth(Gw) are bank level control variables. While, GDP,
inflation(Inf) and interest rate(IR) are country level control variables in our model. μ
is error term.

In analysis model 1 is estimated with equation 1, which incorporates 1 proxy

of each Independent variables (ID, Ler and CAR) along with bank specific and
country specific control variables.

30
ZS=α + β 1 ( ID ) + β 2 ( Ler ) + β 3 (CAR ) + β 4 ( Lev ) + β 5 ( Liq ) + β 6 ¿………………………
…………….. Eq.(1)

Where ZS denote Z-score (measure of bank risk taking), ID denotes Income

diversification, Ler (Lerner index measuring competition), CAR (capital to asset ratio
measuring regulation), Lev, Liq, Size, Gw, IR, Inf and GDP are control variables
included in the model.

Model 2 is estimated with equation 2, which incorporates other proxy of each

Independent variables (AD, HS and DI) along with bank specific and country specific
control variables.

ZS=α + β 1 ( AD )+ β 2 ( HS )+ β 3 ( DI ) + β 4 ( Lev ) + β 5 ( Liq )+ β 6 ¿…………………………

………...... Eq.(2)

Model 3 is estimated with equation 3, which incorporates all proxies of each

Independent variables (ID, AD, Ler, HS, CAR and DI) along with bank specific and
country specific control variables.

ZS=α + β 1 ( ID ) + β 2 ( AD ) + β 3 ( Ler ) + β 4 ( HS ) + β 5 ( CAR )+ β 6 ( DI ) + β 7 ( lev ) + β 8 ( Liq ) + β 9¿

………………………………………………………………………... Eq.(3)

Model 4-6 are estimated with NPL (Non-performing loans ratio). Model 4 is
estimated with equation 4, which incorporates 1 proxy of each Independent variables
(ID, Ler and CAR) along with bank specific and country specific control variables.

NPL=α + β 1 ( ID )+ β 2 ( Ler )+ β 3 ( CAR ) + β 4 ( Lev ) + β 5 ( Liq ) + β 6 ¿……………………

…………...…... Eq.(4)

Model 5 is estimated with equation 5, which incorporates other proxy of each

Independent variables (AD, HS and DI) along with bank specific and country specific
control variables.

NPL=α + β 1 ( AD ) + β 2 ( HS ) + β 3 ( DI ) + β 4 ( Lev ) + β 5 ( Liq ) + β 6 ¿………………………

…………...... Eq.(5)

Model 3 is estimated with equation 3, which incorporates all proxies of each

Independent variables (ID, AD, Ler, HS, CAR and DI) along with bank specific and
country specific control variables.

31
NPL=α + β 1 ( ID )+ β 2 ( AD ) + β 3 ( Ler ) + β 4 ( HS ) + β 5 ( CAR ) + β 6 ( DI )+ β 7 ( lev ) + β 8 ( Liq ) + β 9 ¿
……………………………………………………………………...… Eq.(6)

3.6 Techniques

3.6.1 Descriptive Analysis

Descriptive analysis is used to analyze complete data or a sample of

summarized numerical data. Descriptive statistics contains information about mean,
median, standard deviation, maximum value, minimum value and total number of
observations. Descriptive statistics summarizes or describes characteristics of a data
set. Descriptive Statistics help presents quantitative descriptions in a manageable
form. With the help of descriptive statistics, we simplify large amounts of data in a
meaningful way.

3.6.2 Correlation & Multicollinearity Diagnostic Test

Analysis of correlation is a statistical method used for determining the strength

of the association between two or more quantitative variables. A strong correlation
means two or more variables are closely related to each other, while a weak
correlation means the variables are seldom related.
Multicollinearity is basically defined as a state of strong intercorrelations or
inter-associations between the independent variables. It is a type of disturbance in the
data and makes unreliable estimates about the data if it exists in the data.
There are different ways of detecting multicollinearity in the data. One way is
through simple correlation co-efficient. If there is high correlation between the
independent variables there will be multicollinearity. Multicollinearity can also be
detected with the help of variance inflation factor (VIF) and tolerance (1/VIF). Value
of VIF must be below 5 (Ringle et al., 2015). If the value of VIF 10 or above and
value of tolerance is below 0.2, then the multicollinearity is problematic.

3.6.3 Regression Analysis

Regression analysis is used to test the nature of relationships between a
dependent variable and one or more independent variables. We have used two step
system dynamic panel gmm estimation technique for analysis proposed by (Arellano
& Bover, 1990). It is ideal to use when there is large cross-sections(N) and small
number of period (T). We used dynamic system-gmm panel model due to several

32
reasons. First, to control Omitted variable bias, omitted variable bias means that such
models are mis specified. Second, to monitor the endogeneity of the lagged dependent
variable in a system dynamic panel- in which the explanatory variables are associated
with the error term.  Third, if heteroskedasticity is present, the GMM estimator is
more efficient. Finally, it is used to control measurement errors and panel
heterogeneity that are not observed.

33
 CHAPTER 4

RESULTS AND DISCUSSION

In this chapter, the impact of independent variables on dependent variables is
discussed. Results are presented in the form of tables with correlation matrix,
descriptive statistics and Generalized Method of Moments.

4.1 Results

Table-4.1:Descriptive Statistics of overall sample

  Mean Median Maximum Minimum Std. Dev. Obs.
ZS 4.2017 4.3698 6.3873 0.1496 108.88 844
NPL 0.0569 0.0318 0.8823 0.001 0.0750 781
ID 0.3134 0.2969 2.7722 -0.974 0.2261 844
AD 0.4663 0.4339 1.0167 0.0697 0.1696 844
Ler -0.491 -0.383 0.9421 -1.999 0.6418 844
HS 0.5679 0.576 0.792 0.165 0.1701 477
CAR 0.1654 0.1532 0.9765 0.0108 0.0749 780
DI 0.7997 1 1 0 0.4004 844
Lev 0.1012 0.0907 0.7376 -0.113 0.0931 844
Liq 0.7572 0.7509 2.7803 0.0343 0.2783 844
Size 14.303 13.934 20.579 9.2091 2.1532 844
Gw 0.1636 0.1235 3.8663 -0.372 0.2427 728
IR 0.0533 0.0483 0.2334 0.0119 0.0400 687
Inf 0.0484 0.0408 0.1867 -0.0374 0.0337 844
GDP 0.0542 0.0552 0.1111 0.0019 0.0201 844
Note: ZS is bank level Z-Score, NPL is Non-performing Loans Ratio, ID is the Income Diversification, AD is Assets
Diversification, Ler is Lerner Index, HS is H-Statistics, CAR is Capital Asset Ratio, DI is Deposits Insurance, Lev is Leverage,
Liq is Liquidity, Size is Bank Size, Gw is Growth, IR is Interest Rates, Inf is Inflation and GDP is Gross Domestic Product.

The mean, median, maximum and minimum values, standard deviation of

each variable and total observations of the study are shown in Table 4.1. The values
cover the time period ranging from 2010 to 2018 which consists of an unbalanced
panel. The Risk measures of the study are Z-Score and Non-Performing Loans Ratio.
Average values of risk taking of listed banks in Asian Emerging Economies show the
same trend with smaller variations in the values of bank risk taking which indicate
that there is no outlier in the data. Diversification strategies of the study consists of
Income diversification and Assets diversification. Average value of income
diversification shows that banks in this region diversify about one third of their risky
investments by investing in non-interest income activities. Competition measures of

34
the study include Lerner index and H-statistics, which show lesser variations in the
values. Regulation measures consists of CAR and Deposits insurance. Capital Asset
Ratio shows that on average banks in Asian emerging economies has minimum 16%
CAR. Control variables in the present study include Leverage, Liquidity, Bank Size,
Growth, Interest Rates, Inflation and GDP. All these control variables show lesser
variations in the values.

35
Table-2 Test of Multicollinearity
Variable VIF 1/VIF
Inf 4.99 0.2004
IR 3.42 0.2923
HS 3.16 0.3162
DI 3.00 0.3328
Ler 1.88 0.5330
Lev 1.87 0.5358
Liq 1.77 0.5636
GDP 1.44 0.6961
AD 1.40 0.7150
Size 1.31 0.7609
CAR 1.31 0.7623
ID 1.11 0.8979
Gw 1.08 0.9275
Note: VIF = Variance Inflation Factor

We explain the Variance Inflation Factor (VIF) to verify multicollinearity in

the analysis in table 2. Values of VIF are not more than 5 (Ringle et al., 2015), so we
confirm no multicollinearity problem exists in this study.

36
Table 4.2: Correlation analysis of listed banks in Asian Emerging Economies

  ZS NPL ID AD Ler HS CAR DI Lev Liq Size Gw IR Inf GDP

ZS 1.000
NPL -0.225 1.000
ID -0.166 0.155 1.000
AD 0.007 0.214 0.101 1.000
Ler 0.093 -0.432 -0.088 -0.241 1.000
HS -0.019 0.434 -0.085 0.387 -0.454 1.000
CAR -0.108 -0.120 0.009 0.110 0.224 -0.077 1.000
DI 0.089 -0.636 0.076 -0.378 0.481 -0.662 0.099 1.000
Lev 0.046 -0.160 0.080 -0.134 0.332 -0.105 0.405 0.258 1.000
Liq 0.200 -0.035 -0.027 -0.229 0.112 0.181 -0.118 0.012 0.4831 1.000
Size 0.202 -0.207 -0.038 -0.116 0.317 -0.293 0.151 0.362 0.1419 0.163 1.000
Gw -0.091 -0.101 0.028 0.077 0.042 0.006 0.007 0.024 -0.021 -0.139 0.044 1.000
IR -0.011 0.294 -0.118 0.225 -0.329 0.667 -0.019 -0.420 -0.005 0.066 -0.16 -0.03 1.000
Inf -0.081 0.515 -0.098 0.341 -0.426 0.680 -0.019 -0.692 -0.072 -0.009 -0.31 0.019 0.772 1.000
GDP -0.035 -0.131 0.014 -0.022 0.323 -0.094 0.116 0.121 -0.068 -0.201 0.089 0.137 -0.13 -0.27 1.000

37
38
 The correlation matrix of all explanatory variables of the study is presented in
Table 4.2, which is calculated based on data of listed banks operates in Asian
Emerging Economies. Correlation matrix is analyzed to check the issue of
multicollinearity between explanatory variables. Highest correlation is 0.772 which is
between Interest rates and Inflation, while lowest correlation value is -0.005 which is
between Leverage and Interest rate. Therefore, results of correlation matrix show that
there is no highly correlation between explanatory variables, so there is no issue of
multicollinearity.

39
Table 4.3: Two-step system dynamic panel estimation with Z-Score
Model 1 Model 2 Model 3
Variable
s Coef. t-Stat Coef. t-Stat Coef. t-Stat
L1. 0.184*** (3.13) -0.150 (-0.82) 0.120 (0.60)
L2. -0.179*** (-3.57) -0.386*** (-3.30) -0.375*** (-2.76)
ID -1.004*** (-5.39)  --- --- -0.980*** (-5.97)
AD  --- --- 1.336 (1.17) 2.340** (2.24)
Ler 0.312** (2.07)  --- --- 0.756** (1.97)
HS  --- --- -2.388*** (-2.91) -1.323 (-1.28)
CAR 0.594** (2.02)  --- --- -0.163 (-0.17)
DI  --- --- -0.245 (-0.23) -1.769** (-1.91)
Lev -0.806 (-0.61) 5.478 (1.23) 4.419 (1.14)
Liq 1.228** (2.57) -0.720 (-0.59) 0.593 (0.53)
Size -0.117 (-1.56) 0.259 (1.14) 0.234 (1.14)
Gw -0.088 (-0.56) -0.853** (-2.39) -0.422 (-1.28)
IR 2.558 (1.27) 2.200 (0.32) -0.402 (-0.05)
Inf -0.138 (-0.11) -1.533 (-0.35) 2.921 (0.69)
GDP 2.617 (1.33) 6.211* (1.83) 2.504 (0.57)
C 5.635*** (4.16) 1.144 (0.27) 1.336 (0.37)
Note: L1. is First Lag of dependent variable, L2. is second Lag of dependent variable, Z-Score is bank level Z-Score, ID is
Income Diversification, AD is Assets Diversification, Ler is Lerner Index, HS is H-Statistics, CAR is Capital Asset Ratio, DI
denotes deposits insurance, Lev, Liq, size, Gw denotes Leverage, Liquidity, Size and Growth, while IR, Inf and GDP are Interest
rate, Inflation and GDP,***, ** and * show significance level at 1%, 5% and 10%

Model 1-3 are estimated with Z-Score. Diversification as measured by income

diversification has a significant impact on banks risk taking. An increase in income
diversification is associated with decrease in risk taking by banks thus improves
stability of banks and empirically, aligned with (Lee et al., 2014) . Another measure
of diversification used in this study is Assets diversification which is significantly and
positively associated with banks risk taking which imply that increase in assets
diversification increase banks risk taking suggested that assets diversification do not
benefit banks and banks have not expanded their non-interest bearing assets to the
point where they achieve maximum benefits of diversification (Moudud-Ul-Huq,
2019). Competition as measured by Lerner index and H-Statistics has significant
negative impact on bank risk taking. An increase in Lerner index means increase in
market power of banks and decrease in competition and is associated with increased
risk taking by banks consistent with competition stability or risk shifting view of
(Boyd & De Nicoló, 2005). Banks capital regulation as measured by CAR (Capital to
Risk weighted Assets Ratio) show significant positive relationship with banks risk
taking analogous to the studies of (Altunbas et al., 2007; Rime, 2001; Shrieves &

40
Dahl, 1992). Deposit Insurance is the other measure of banks regulation in the study
which is negatively associated with banks risk taking means that increase in deposit
insurance results decrease in banks risk taking support moral hazard minimization
effect (Demirgüç-Kunt & Huizinga, 2004). Among control variables liquidity is found
to have positive impact on banks risk taking, while growth and GDP negatively affect
bank risk taking.

41
Table 4.4: Two-step system dynamic panel estimation with NPL
Model 1 Model 2 Model 3
Variable
s Coef. t-Stat Coef. t-Stat Coef. t-Stat
L1. 0.055*** (21.12) 0.733*** (7.34) 0.7587*** (6.58)
L2. -0.035*** (-55.12) 0.133** (2.50) 0.1279** (2.39)
ID 0.021*** (3.18)  --- --- 0.003 (0.86)
AD  --- --- 0.012** (2.59) 0.037 (0.91)
Ler 0.032** (2.37)  --- --- 0.039** (2.25)
HS  --- --- -0.020 (-1.18) -0.014** (-2.54)
CAR -0.027*** (-3.63)  --- --- -0.020 (-0.86)
DI  --- --- -0.044* (-1.80) -0.027 (-0.65)
Lev -0.052** (-2.53) -0.014 (-0.30) 0.033 (0.43)
Liq 0.075*** (5.36) 0.029* (1.70) 0.025 (1.11)
Size -0.001 (-0.47) 0.011* (1.86) 0.012* (1.90)
Gw 0.032*** (6.41) -0.009 (-1.15) -0.012 (-1.29)
IR 0.955*** (10.44) -0.170 (-0.57) -0.112 (-0.36)
Inf 0.064** (2.13) 0.301** (2.75) 0.337** (2.49)
GDP -0.030 (-0.78) -0.097 (-1.55) -0.138* (-1.83)
C -0.036 (-0.89) -0.1375 (-1.19) -0.185 (-1.52)
Note: L1. is First Lag of dependent variable, L2. is second Lag of dependent variable, NPL is Non-Performing Loans Ratio, ID is
Income Diversification, AD is Assets Diversification, Ler is Lerner Index, HS is H-Statistics, CAR is Capital Asset Ratio, DI
denotes deposits insurance, Lev, Liq, size, Gw denotes Leverage, Liquidity, Size and Growth, while IR, Inf and GDP are Interest
rate, Inflation and GDP,***, ** and * show significance level at 1%, 5% and 10%

Model 4-6 are estimated with NPL ratio. Diversification has significant
positive impact on NPL Ratio when measured with income diversification and Assets
diversification. Significant positive association between income or assets
diversification and banks risk taking indicate that increase in income or assets
diversification results in higher npl ratio thus increase risk taking by banks,
empirically aligned with studies of (Boyd et al., 1993; Stiroh & Rumble, 2006).
Competition has significant negative impact using both measures in these models with
NPL Ratio supporting competition-stability view of (Boyd & De Nicoló, 2005).
However, banks capital regulations found to have negative impact on NPL Ratio
when measure with CAR and significant negative impact when measure with deposit
insurance. Increase in CAR results in declining NPL ratio thus decrease banks risk
taking indicating that bank can increase the capital base to meet the regulatory
requirement which reduce the portfolio risk and in line with study of (Jacques &
Nigro, 1997). All the Control variables are found to have significant impact on banks
NPL Ratio. Leverage and GDP negatively affect NPL Ratio while Liquidity, Bank
Size, Growth, Inflation and Interest rates are positively associated with Banks NPL
Ratio.

42
4.2 Major Findings and Discussion

Major findings of the study indicate that diversification, competition and

regulation are significantly associated with banks risk taking. When banks risk taking
is measured with Z-Score, income diversification is negatively related with banks risk
taking which means banks risk taking reduces as banks diversified their income
sources. This confirmed portfolio theory applied to banking (Diamond, 1984) and H2
hypothesis. However, Assets diversification on the other hand found positively related
with banks risk taking indicating that diversification into non-interest-bearing assets
increases banks risk taking which confirmed H1 and empirically aligned with the study
of (Moudud-Ul-Huq, 2019).

Competition measured with both Lerner index and H-Statistic is negatively

related with bank risk taking show supports for competition-stability view of (Boyd &
De Nicoló, 2005). Regulation when proxied with CAR is related positively with banks
risk taking empirically aligned with the study of (Altunbas et al., 2007; Rime, 2001)
and confirmed H5. Findings suggest negative relationship between deposit insurance
and banks risk taking supporting moral hazard minimization effect (Demirgüç-Kunt &
Huizinga, 2004) and confirmed H6.

Further, findings with Z-Score suggests that among control variables, GDP
negatively affect banks risk taking empirically aligned with study of (Kosmidou,
2008)and confirmed H10. Growth is found to have significant impact on banks risk
taking and confirmed H9. Liquidity is also significantly related with banks risk taking
analogues to the study of Diamond and Dybvig (1983) and confirmed H8.

When risk taking is measured with NPL ratio, both income and assets
diversification is found to be positively related with banks risk taking which indicate
that increase in income or assets diversification results in higher npl ratio thus
increase risk taking by banks empirically support study of Stiroh & Rumble (2006)
and confirmed H1.

However, competition is negatively related with NPL ratio which means that
increase in competition results in lower NPL ratio, thus reduces banks risk taking
theoratically support competition stability view of (Boyd & De Nicoló, 2005) and
confirmed H4. Regulation measured with both CAR and Deposit insurance negatively

43
impact banks risk taking which is empirically aligned with the study of (Jacques &
Nigro, 1997) and (Demirgüç-Kunt & Huizinga, 2004) and confirmed H6.

Further, results with NPL ratio suggests that all the bank level and country
level control variables have significant impact on banks risk taking and empirically in
line with the studies of (Laeven & Marquez, 2014;González,2005; Köhler,
2012;Louati et al., 2015) and confirmed H7 to H13.

44
 CHAPTER 5

CONCLUSION AND RECOMMENDATIONS

This chapter concludes the current research by considering recommendations,
practical implications and limitations. Furthermore, the chapter also highlights the
areas which are opened for future research.

5.1 Conclusion

The banking sector has an important role in the economic growth of emerging
economies. There is need of detailed analysis of the stability of this sector at industry
level and at bank level. In the present competitive environment, financial
liberalization and financial markets openness has forced the banks to diversify.
Diversification benefits might not be similar across countries or regions.
Diversification, competition and banks regulations play significant role in determining
risk taking by banks. The impact of these determinants on banks’ risk taking has been
analyzed independently, but the combined analysis of these determinants still needed
to be analyzed.
The main purpose of the study was to investigate the impact of
diversification, competition and banks regulation on the risk-taking of listed banks
operates in 10 Asian Emerging economies. Banks risk taking is measured with Z-
Score and Non-performing loans ratio. Another purpose of the study is comparative
analysis of results using both measures of banks risk taking.
This section summarizes the research objectives and findings of the study
including an overall analysis of banking sector of Asian Emerging Economies. Then
the chapter discusses the recommendations based on outcomes of the study, then
practical implications of the research findings. Finally, it identifies drawbacks of the
study and explores future directions for further research.
Generally, results with Z-score show that income diversification reduce banks
risk taking while assets diversification is detrimental for financial stability Asian
emerging countries. On the other hand, results find support for competition-stability
view using both measures of competition. Regulation such as capital to risk weighted
assets ratio increase overall banks risk taking. While, the presence of deposits
insurance reduce risk taking by banks.

45
 Results with Non-performing loans show that both income and assets
diversification increase probability of loan defaults thus risky for banks. Competition
using both measures negatively impact banks Non-performing loans ratio indicating
lower probability of default. Capital to risk weighted assets decreases banks
probability of failure. Overall analysis shows that diversification, whether income or
assets, competition and banks regulation have significant impact on both measures of
risk.

5.2 Recommendations

Based on the analysis and results, this study presents some recommendations
to bring improvement in the financial stability through appropriate risk-taking
decisions in the banking sector of Asian Emerging Economies. This sector needs to
improve its financial stability as the economy of these Asian Emerging economies
largely depends on their banking sector. The banks managers, Regulators and Policy
makers should consider identified determinants of financial Stability while making
major financial decisions. It is recommended that higher reliance on income
diversification could benefit banks in Asian emerging economies. But also, there is a
need of proper management of diversification decisions as inefficient diversification
can also lead to increasing in risk. This study also recommends that competition and
stricter capital regulations help banks to reduce risk taking and improves stability of
banking sector.

5.3 Practical Implications

The findings suggest that the current study is helpful for managers, regulators,
policy makers and researchers. For managers, the study helps them to make the
decision whether or not to invest in non-interest-bearing assets. The implications of
the study provide how income diversification should be managed in order to improve
financial stability and reduce banks risk taking. The regulators and policy makers may
make such policies that help banks to reduce risk taking and enhance stability.

5.4 Limitations and Future Directions

Firstly, this study can be extended by including both listed and unlisted banks
for the same sample of 10 Asian Emerging Economies. Secondly, this study can also
be extended by incorporating market-based measures of bank risk-taking. Thirdly, the

46
study can be extended by considering both developed and emerging economies
sample for comparison of results across these two regions. Lastly, the same research
can be done on the developed countries alone.

47
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Appendix

China
Sr. Bank Name Sr. Bank Name
1 Bank of China Limited 5 Huishang Bank Co Ltd
2 Bank of Jiangsu Co. Ltd. 6 ICBC
3 China Construction Bank Corp. 7 Haitong Securities Co. Ltd
4 Chonging Rural Commercial Bank
India
Sr. Bank Name Sr. Bank Name
1 Allahabad Bank 11 ICICI Bank Limited
2 Bank of Baroda 12 Kotak Mahindra Bank Limited
3 Canara Bank 13 Lakshmi Vilas Bank
4 Central Bank of India 14 Mahindra & Financial Services Ltd
5 Choalam Investment & Finance Co. 15 South Indian Bank
6 City Union Bank 16 Standard Chartered India
7 Corporation Bank Ltd. 17 Syndicate Bank
8 Dcb Bank 18 UCO Bank
9 Federal Bank Ltd. (The) 19 Union Bank of India
10 HDFC Bank Ltd 20 YES BANK
Indonesia
Sr. Bank Name Sr. Bank Name
1 Bank Bumi Arta Tbk 10 PT Bank BTPN Tbk
2 Bank Mandiri (Persero) Tbk 11 PT Bank China Construction Bank
3 Bank Negara Indonesia (Persero) 12 PT Bank CIMB Niaga Tbk
4 Bank Pan Indonesia Tbk PT 13 PT Bank Ganesha Tbk
5 Bank Pembangun Jawa Tbk 14 PT Bank jRrust Indoseia Tbk
6 Bank Rakyat Indonesia Tbk 15 PT Bank Tabungan Nasional Tbk
7 Bank Victoria International Tbk 16 PT Bank Woori Indonesia Tbk
8 PT Bank Maspion Indonesia 17 PT Bank Yudha Bhakti Tbk
9 PT Bank BRI syariah Tbk
Lebanon
Sr. Bank Name Sr. Bank Name
1 B.L.C. Bank S.A.L 4 Banque BEMO Sal
2 Bank Audi SAL 5 BLOM Bank s.a.l.
3 Bank of Beirut S.A.L. 6 Byblos Bank S.A.L.
Malaysia
Sr. Bank Name Sr. Bank Name
1 Affin Holdings Berhad 5 Hong Leong Financial Group Bhd
2 CIMB Group Holdings Berhad 6 OSK Holdings Berhad
3 Hong Leong Bank Berhad 7 Public Bank Berhad
4 Hong Leong Capital Berhad 8 RHB Capital Berhad
Pakistan
Sr. Bank Name Sr. Bank Name
1 Allied Bank Limited 11 Habib Metropolitan Bank Limited
2 Apna Microfinance Bank Limited 12 JS Bank Limited
3 Askari Bank Limited 13 MCB Bank Limited
4 Bank Al Habib 14 Meezan Bank Limited
5 Bank Al-Falah Limited 15 National Bank of Pakistan
6 Bank Of Khyber Limited 16 Samba Bank Limited

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 7 Bank Of Punjab Limited 17 Silkbank Limited
8 BankIslami Pakistan Limited 18 Standard Chartered Bank (PK)
9 Faysal Bank Limited 19 Summit Bank Limited
10 Habib Bank Limited 20 United Bank Limited
Philippines
Sr. Bank Name Sr. Bank Name
1 Asia United Bank Corporation 10 Philippine Bank of Communications
2 Bank of The Philippine Islands 11 Philippine Business Bank
3 BDO Leasing and Finance Inc 12 Philippine National Bank
4 BDO Unibank Inc 13 Philippine Saving Bank
5 China Banking Corporation 14 Philippine Trust Company
6 Citystate Savings Bank, Inc. 15 Rizal Commercial Banking Corp.
7 Col Financial Group, Inc 16 Security Bank Corporation
8 First Metro Investment Corporation 17 Union Bank of the Philippines
9 Metropolitan Bank & Trust Co.
Thailand
Sr. Bank Name Sr. Bank Name
1 Bangkok Bank Public Co. Limited 6 MFC Asset Management Co. Ltd
2 CIMB Thai Bank Public Co. Limited 7 Siam Commercial Bank Co. Ltd
3 Kiatnakin Bank Public Co. Limited 8 Thanachart Capital Public Co. Ltd
4 Krung Thai Bank Public Co. Limited 9 TISCO Financial Group PCL
5 Kim Eng Securities Public Co. Ltd 10 TMB Bank Public Co. Ltd
Turkey
Sr. Bank Name Sr. Bank Name
1 Akbank T.A.S. 5 Koçbank
2 Denizbank A.S. 6 Sekerbank T.A.S.
3 Finansbank A.S. 7 Turk Ekonomi Bankasi A.S.
4 HSBC Bank (Turkey) 8 Yapi Ve Kredi Bankasi A.S.
Vietnam
Sr. Bank Name Sr. Bank Name
Saigon Thuong Commercial JS
1 Asia Commercial Bank 3 Bank
2 Saigon - Hanoi Commercial JS Bank

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