Impact of bank capital on non‐performing loans: New evidence of concave capital from dynamic panel‐data and time series analysis in Malaysia

Yaman Hajja

International Journal of Finance & Economics, 2022, vol. 27, issue 3, 2921-2948

Abstract: Amid the steep expansion in Malaysia household debt, we investigate the role of bank capital in disciplining non‐performing loans (NPLs) after controlling for the macroeconomic environment. Utilizing generalized method of moments (GMM) on a dynamic panel‐data of 19 commercial banks and stress testing of NPLs using vector autoregression (VAR) on aggregated‐monthly time series of the banking system, we provide new evidence that the capital (in the past and in the future) is a concave function of NPLs implying that increasing the capital will initially increase the NPLs until NPLs reach a maximum threshold (under the moral hazard effect), after which more capital build ups will succeed in decreasing NPLs (under the disciplinary or regulatory effect). We also find that higher levels in GDP growth and lending interest rate and are associated with more NPLs, while higher inflation is associated with less NPLs. Monetary expansion, that is, higher money supply growth raises NPLs in banks, while competition between banks and higher liquidity of the stock market are NPLs reducing.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1002/ijfe.2305

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:27:y:2022:i:3:p:2921-2948

Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307

Access Statistics for this article

International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().