The effect of financial market development on bank risk: evidence from Southeast Asian countries

Abstract

This paper examines how bank risk varies with changes in financial markets development in a broad data set of 52 publicly listed commercial banks in five Southeast Asian countries over a 23-year period between 1990 and 2012. A consequence of two financial crises (i.e. the Asian financial crisis of 1997–1998 and the global financial crisis of 2007–2009) provides a natural experiment in which linkages between financial markets development and bank risk are measured. Empirical results show that higher degrees of financial markets development are associated with weaker bank capital positions and are positively related to higher degrees of bank revenue diversification. There is also evidence for a U-shaped relationship between the degree of financial markets development and bank capital.