Do the business cycle and revenue diversification matter for banks’ capital buffer and credit risk: evidence from ASEAN banks

Nafisa Ovi, Sudipta Bose, Abeyratna Gunasekarage, Syed Shams

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Abstract

We examine the association of the business cycle and revenue diversification with the banks’ capital buffer and credit risk for a sample of banks from the Association of Southeast Asian Nations (ASEAN) region from 1998 to 2018, using 2847 banking firm–year observations. We find that ASEAN region banks react anticyclically in adjusting their capital buffer levels and credit risk. We find revenue diversification benefits and that banks, through revenue diversification, can reduce their credit risk while achieving capital savings when confronting economic downturns. Our results offer support for the Basel III accord. However, the relations revealed are somewhat moderated by the regulatory quality, competition, and phase of the business cycle encountered by ASEAN region banks.

Original languageEnglish
Article number100186
Number of pages19
JournalJournal of Contemporary Accounting and Economics
Volume16
Issue number1
DOIs
Publication statusPublished - Apr 2020

Keywords

  • Basel III Accord
  • Business cycle
  • Capital buffer
  • Credit risk
  • Revenue diversification

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