Bank Risk and National Governance in Asia

Abstract

The role of national governance upon bank-level risk in the Asian region is analysed. Improvements in national governance are risk reducing at the bank level in developed nations in the Asian region, and over the longer run for those nations affected by the Asian Financial Crisis. A U-shaped relationship between bank risk and bank capital is found, and it is argued that the risk reducing impact of increased capital holdings is close to satiation for developed nations in particular. Evidence of risk seeking due to ‘too big to fail’ effects is observed; with improved national governance able to partially offset some of the moral hazard due to size in developed nations, but not in developing nations. In developing nations increased size interacts with improved national governance to result in increased bank risk.