*4.3.2 Results for large banks and small banks*

Bank size does influence the relationship of capital, risk, and efficiency. The sample is divided into two groups of large and small banks. Both groups display the same impact of capital on risk and efficiency as shown in **Table 5**. However, the behavior is different in capital equation as both risk and efficiency negatively cause changes in capital of large banks while such causation is not evidenced in small banks.

**Figure 4** reports the IRFs for large and small banks. Row 2 column 1 of **Figure 4** reports the capital shock on efficiency. The effect is positive for both large and small banks, but impact on large banks lasts more than 3 years as compared to 1 year in small banks. Large banks also experience a decrease in capital following the shock in efficiency, but such response is not significant in small banks. The negative and bidirectional causal relationship between risk and capital is observed in both large and small banks. Moral hazard behavior is found in ASEAN banks regardless of bank size.

VDC estimations are presented in **Table 7**. With regard to the variation of cost efficiency, capital of large banks can explain 14% and capital of small banks explains 10%. Risk can explain only negligible percentage of efficiency forecast error variance. In strong contrast, 43% of capital variation for large banks is explained by efficiency, but the explanatory power is only 1% for small banks. The influence of efficiency on capital is clearly observed in large banks only. That is, efficiency influences capitalization only in large banks. In large banks, capital and efficiency have strong explanatory power over the risk variance, but the response in small banks is opposite.

### **Figure 4.**

*Impulse response functions for large and small banks. Subsample of large banks. Subsample of small banks.*


**Table 7.**

*VDC for subsamples of large banks and small banks.*

### *4.3.3 Results for the precrisis and postcrisis periods*

The 2008 global crisis has adverse impact on banking and financial system around the world, and ASEAN region is not an exception. It is important to see the difference in behavior of banks before and after the crisis. To study the impact of crisis on the interactions among capital, risk, and efficiency, subsamples of pre and postcrisis are investigated. Regression results indicate that increased capital causes improvement in efficiency and reduction in risk both before and after the crisis. The impact of cost efficiency on capital displays different causation for the two periods as shown in **Table 8**. Efficiency helps improve bank capital in the precrisis period. However, such causation is not seen in postcrisis period. After the crisis, banks tend to maintain their capital in order to protect themselves against negative shocks.

**Figure 5** displays the IRF graph. Before the crisis, the effect of capital shock on efficiency gradually declined, while after the crisis, the response rose over 2 years and subsequently decreased thereafter. The reverse causation, from efficiency to capital, differs between the two periods with an increase before the crisis but decrease after the crisis.


### **Table 8.**

*Sensitivity analysis for subsamples of precrisis and postcrisis.*

*Causal Relationship Among Bank Capitalization, Efficiency, and Risk-Taking in ASEAN… DOI: http://dx.doi.org/10.5772/intechopen.109120*

### **Figure 5.**

*Impulse response functions for pre- and postcrisis periods. Precrisis. Postcrisis.*


#### **Table 9.** *VDC for subsamples of precrisis and post crisis.*

**Table 9** reports the variance decomposition. It reveals that 29% of efficiency variance is explained by capital before crisis, but the percentage drops to 12% after the crisis. Before the crisis, efficiency disturbances explain close to 34% of the forecast error variance of capital over 10 years. The shocks in capital and efficiency explain 18 and 13% of the variation in risk in precrisis period. But after the crisis, the explanatory power of capital and efficiency is rather small. The VDC results imply a strong response of the three factors to exogenous shock in precrisis rather than post crisis period.
