Relationship between bank ownership concentration on capital adequacy, liquidity, and capital stability in the listed banks in Tehran stock exchange

Abstract

In this study we explore the effects of ownership concentration on the risk-taking behavior of banks. Our analysis focuses on East Asian countries because these nations have successfully implemented the Basel standards and have demonstrated a high degree of regulatory convergence. For the period from 2005 to 2009, we analyzed the relation between ownership concentration and capital adequacy (Basel II) and find that an increase in ownership concentration by one standard deviation results in an improvement in capital adequacy by 32%.

Motivated by public policy considerations, we analyze the impact of bank ownership structure as a governance mechanism on capital adequacy and liquidity in Asian banks. The results show that as ownership concentration rises, banks become well capitalized and more liquid. The impact is both statistically and economically significant. Our results complement recent findings reported by Peni and Vahamaa (2011) that corporate governance mechanisms are material factors in explaining banks’ behavior and their market performance. Our results also support Vauhkonen’s (2011) findings that market discipline manifested through ownership concentration significantly impacts banks’ capital adequacy, liquidity, and capital stability

Keywords: Basel II; bank ownership; capital adequacy; capital stability; financial crisis