Recent theories suggest the relation between banks' charter values and capital buffers is nonlinear and a function of the value of the charter. Using novel threshold estimation techniques, we investigate this for a cross section of 239 commercial banks in 24 Asian economies during the 2008 crisis and post crisis periods. For the latter period, a negative relation seems to dominate for high charter value banks in Asia (excluding Middle East region). During crises, our results for advanced Asian economies are consistent with capital buffer theory. Our findings raise distinct policy implications for the regulation and supervision of Asian banks.

The growing relevance of Islamic banking from a prudential perspective warrants the need to investigate the susceptibilities of Islamic banks’ capital buffers to unique risks emanating from their operating environments. We employ a panel model using two-step dynamic Generalized Method of Moments (GMM) on a data set comprising 128 conventional and Islamic banks. Our results tend to indicate privately owned Islamic banks, unlike their state owned counterparts, attempt to safeguard shareholders by independently mitigating the effects of displaced commercial risk through higher capital buffers. The relation between equity investment risk and bank capital buffers also seems to vary by region.