New perspectives on bank risk in Malaysia

R.J Powell

doi:10.1080/23322039.2017.1326217

Abstract

AbstractStable banks in individual ASEAN countries are essential to the economic stability of the ASEAN region as these countries move towards the goal of greater financial integration in the region. This study comprehensively explores bank risk in Malaysia as compared to the ASEAN region over an 18-year period which includes the Asian and Global Financial Crises. Metrics used include non-performing loans (NPLs), conditional distance to default (CDD which focuses on tail risk of asset volatility and is the authors own measure of bank default based on an extension to the Merton distance to default (DD) model) and a tail risk (TR) measure being the difference between DD and CDD asset volatility. DD is usually applied to corporate customers of banks but has been applied in the literature to banks themselves, which is the approach used for CDD in this study. Multiple regression analysis is undertaken to assess the impact of CDD on returns. The regression and default results are compared between small and larg...

Highlights

This study provides a comprehensive empirical exploration of Malaysian bank risk in comparison to the ASEAN region with a particular focus on extreme risk, in that the period explored covers both the Asian Financial Crisis (AFC) and the Global Financial Crisis (GFC), and that the metrics incorporate the author’s own unique measures of extreme risk, CDD which measures default risk based on extreme market fluctuations, and tail risk (TR) which measures the length of the tail of the distribution of market asset values
The research questions are whether CDD and non-performing loans (NPLs) display similar trends, whether the TR of Malaysian banks changes over time, whether CDD differs between smaller and larger banks, and whether there are differences in these metrics between Malaysian Banks and the ASEAN region as a whole
The research questions set at the start of this study are whether CDD and NPLs display similar trends, whether the TR of Malaysian banks changes over time, whether these factors differ between smaller and larger banks, and how Malaysian banks compare to the ASEAN region

Summary

Introduction

This study provides a comprehensive empirical exploration of Malaysian bank risk in comparison to the ASEAN region with a particular focus on extreme risk, in that the period explored covers both the Asian Financial Crisis (AFC) and the Global Financial Crisis (GFC), and that the metrics incorporate the author’s own unique measures of extreme risk, CDD which measures default risk based on extreme market fluctuations, and TR which measures the length of the tail of the distribution of market asset values.Since the Asian financial crisis, Malaysia has experienced a dramatically reducing trend in NPLs from 18.6 to 1.6%. Substantial improvements in default risk are shown by Malaysian banks over the period and market asset value volatility is consistently lower than the ASEAN region.

Results

Conclusion