**1. Introduction**

Banking sector over the world has altered significantly since the twenty-first century. As part of the globalization, the banking sector is transformed into stronger consolidation, increasing competition, stringent regulation, and innovation. The global financial crises coupled with complex financial transactions and extensive banking integration create pressure for banks in managing risks effectively but maintaining efficiency. The trade-off of bank risk, capital, and efficiency has been the interest of many studies [1–4]. Some studies show that highly cost-efficient banks experience an increase in nonperforming loans [2, 3, 5, 6], while others indicate different results. As the theoretical literature does not suggest a conclusive relation and empirical evidence does provide diverse results for the nexus between bank risk

and efficiency, there is not much comprehensive evidence for the causal, dynamic relationship between risk and efficiency. It is interesting to observe whether the relationship among risk and efficiency is causal and the impact of such causation is temporary or of long-term nature. The work of [7] provides further evidence on the dynamic interactions between risk and efficiency in a more comprehensive way of identifying shock of one variable on the variability of another variable for European banks.

Despite apparent interest of researchers on the interconnectedness of bank risk and efficiency, literature on directional causation with role of bank capital in the relation among risk and efficiency remains scant. Bidirectional causality of risk and efficiency is found in US banks [8], but in European banks, causality running only from risk to efficiency [6, 9] and efficiency causes improvement in capital [10]. Few studies look at the interrelationship of capital, risk, and efficiency in emerging market [11–13], but causality is not investigated. The recent study of [14] in 2021 also evaluates the contemporaneous causal relationship in Indian banks and finds out the causality from inefficiency to bank risk as well as capital to efficiency. However, majority of studies have not addressed the components explaining the causes of changes in the variables. In addition, no prior study investigated the sensitivity of the interactions to certain influential factors of ownership structure, size, or crisis.

The aim of this study is to fill the gap in the literature and to provide a thorough assessment with regard to the causal relationship between risk, capital, and bank efficiency for commercial banks in ASEAN using the panel Vector Autoregression (VAR) analysis to allow for dynamic changes among endogenous variables. The study focuses on the two questions: How do bank capital, risk, and efficiency respond dynamically to their own and other variables'shocks? What are the primary shocks that explain the variability in each variable of capital, risk, and efficiency?

The paper contributes to literature in several ways. First, the study includes bank capital in the dynamic intertwining among risk, capital, and efficiency through a detailed assessment of a novel panel VAR techniques, which is not popularly researched in literature. Second, this is the first study to look at the causal relationship of the three variables for commercial banks in ASEAN by investigating the response of one variable upon the exogenous shock in another variable. Third, the study looks at ASEAN region, an increasingly important player in the global economy with distinctive feature. The ASEAN banking sector increases its integration into the global financial system through the formation of ASEAN banking integration framework (ABIF) to support economic growth and enhance financial inclusion. The integration process of ABIF results in more competitive banking sector, forcing banks to increase capital bases, controlling risk, and focusing on efficiency. Therefore, the region becomes an interesting place for empirical research, which can provide inference for the bank management, regulators, as well as the whole market.

The rest of the chapter is structured as follows: Section 2 presents a literature review, Section 3 covers the hypotheses and research methodology. Section 4 deals with data and data description. Analysis of result is explained in Section 5, and Section 6 concludes the paper.
