**5. Conclusion and policy implications**

This chapter empirically investigates the intertemporal and causal interdependencies among bank capital, risk, and efficiency in the five emerging countries in ASEAN region, a growing dynamic part of the global banking system. We summarize our findings as follows. Firstly, our study finds evidence supporting the bidirectional causality between capital and risk in ASEAN commercial banks. The results also confirm that banks with better capitalization are more efficient. Secondly, we observe different behavior between high-efficiency banks and low-efficiency banks. Following the shock of increasing efficiency, the high-efficiency banks tend to maintain low capital indicating evidence of efficiency risk hypothesis, whereas low-efficiency banks increase their capital ratio to protect franchise value. Lastly, sensitivity analysis of causations among the three factors of capital, risk, and efficiency reveals that stronger capitalization helps improve efficiency regardless of ownership, bank size, and pre or postcrisis period.

The study confirms prior research suggesting that capital, risk, and efficiency of ASEAN commercial banks are causally intertwinned. The analysis substantiates the positive impact of capitalization on bank efficiency. We provide new evidence on different behavior among high-efficiency and low-efficiency banks in the ASEAN region. We further contribute to literature on the influence of ownership, size, and period over the trade-off among capital, risk, and efficiency.

The results from this study provide relevant implications for bank managers and regulators. The result of negative causal relationship between capital and risk and positive causality running from capital to efficiency suggests the importance of bank capital in limiting risk-taking and improving bank performance. Thereby, imposing stronger capital requirements under Basel framework by regulators in the ASEAN region can help achieving both lower risk and higher efficiency. As globalization takes place rapidly in the region, a push to the adoption of the international standards on capital requirement from Basel Accord can help banks in ASEAN region to increase capitalization, resulting in improvement in performance and achieving greater competitiveness in the global market.

A limitation of our study is that the results are based mainly on accounting measure of risk, capital, and efficiency. The measure of risk focuses on credit risk. Other types of risks including market risk, operational risk, and liquidity risk are not captured in the model. Future studies may adopt a more comprehensive measure of risk that incorporates different types of banking risks to determine how the nexus changes in response to different risk factors.
