Financial markets development and bank risk: Experience from Thailand during 1990–2012

• The relation between financial markets development and bank risk in Thailand during 1990–2012 is examined.
• Stock market development has a positive effect on a bank's capitalization ratio.
• Stock market development has a negative effect on a bank's beta.
• Banking sector development has a negative effect on a bank's capitalization ratio.
• Banking sector development has a positive effect on a bank's beta.

The relation between financial markets development and bank risk in Thailand during 1990–2012 is examined. After controlling for macro-level and firm-level variables, stock market development is positively associated with banks’ capitalization ratio, and is negatively related to their beta. While banking sector development has no effect on the banks’ capitalization ratio, it has a positive effect on their beta. In addition, banking sector development is negatively related to the banks’ capitalization ratio when measured as the Tier 1 capital to total risk-weighted assets ratio during 2000–2012. Overall, two dimensions of financial markets development seem to have opposing effects on bank risk. While stock market development tends to lower the banks’ beta, banking sector development induces the instability of the banking system by lowering the banks’ capitalization ratio and by increasing the banks’ beta.