Bank capital, institutional quality and bank stability: international evidence
by Khanh Hoang; Son Tran; Dat Nguyen; Liem Nguyen
International Journal of Revenue Management (IJRM), Vol. 14, No. 1, 2024

Abstract: This study investigates how capital and institutional quality are associated with bank stability using an aggregate dataset comprising 173 banking systems from 2002 to 2020. First, our study suggests that banks with higher capital tend to be more stable, supporting the moral hazard hypothesis. Second, institutional quality improves financial stability of banks, confirming the role of proper banking environment. We further examine how capital and institutional quality jointly affect banking stability, and find that better institutional quality allows capital to impose a more positive effect on bank stability. However, this relationship is more pronounced with banking systems having low capital, indicating that capital and institutional quality could substitute each other in enhancing bank stability when the former is strong enough. These results are robust to the use of alternative proxies for bank stability and capital. We provide several implications for relevant stakeholders to uphold bank stability.

Online publication date: Wed, 10-Jan-2024

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