The impact of capital thresholds on credit risk: Empirical evidence on Malaysian mixed banking systems

Abstract

After the Subprime crisis 2008, the issue of loan default has gained significant importance by regulators, bankers, academia as well as market players around the globe till today. So far, large volume of studies have been devoted in investigating several bank characteristics affecting credit risk, however lack focus has been put to specifically examine the impact of capital thresholds on credit risk level. The issue on how well capitalized banks perform in relation to non-performing loan remains unresolved especially for small developing market of Malaysia. Motivated from here, the purpose of this study is to investigate the impact of capital on non-performing loan problem under different capital thresholds from March 2010 till September 2017. Using non-dynamic panel threshold model, the study finds that capital threshold is significant in affecting the relationship between credit risk and capital level. Furthermore, there is negative relationship between capital and credit risk under large capital regime, suggesting that well-capitalized banks are having adequate resources and expertise, reflecting better risk management and improved governance in minimizing defaults.