Basel II and bank bankruptcy analysis

Abstract

Due to keen competition, banks may increase their market share and profits by imposing price policies, such as raising deposit rates, lowering loan rates, or even worse by loaning to those with high risks, which all could increase the probability of bankruptcy. Under these circumstances, the literature has paid great attention to the topics of bankruptcy and risk management. We adopt a two-stage approach, the Super-SBM and logistic regression, to investigate a bank efficiency index and the bank bankruptcy effect from incorporating capital adequacy regulations and a supervisory review process. This study uses data on 36 Taiwanese commercial banks for the 3-year period from 2002 to 2004. This article's empirical results from the Super-SBM and logistic regression approach are summarized as follows: (1) The efficiency factor is proven to be influential in evaluating bank bankruptcy. (2) If certain prerequisites on capital adequacy are imposed on each bank, then it results in a lower risk to the bank and this reduces bank bankruptcy. (3) Corporate governance plays an important role in bank bankruptcy.