Capital Without Context: Governance Contingency and Bank Performance in Asia

Bank performance depends not only on capital strength but on the governance environment in which that capital operates. Yet existing studies treat capital buffers and institutional quality as parallel, additive drivers, thereby underexploiting their interaction. This study examines how capital adequacy and governance quality jointly shape bank performance across five Asian banking systems, Hong Kong, South Korea, Taiwan, Malaysia, and Vietnam, using 1628 bank-year observations from 123 deposit-taking institutions between 2010 and 2022. Return on assets, net interest margins, non-performing loans, and loan-to-deposit ratios capture performance. System GMM estimation with Bayesian diagnostics addresses endogeneity and dynamic persistence. Stronger Tier 1 capital reliably enhances profitability while compressing margins, consistent with a resilience–spread trade-off. Governance quality exhibits conditional and non-linear effects, beneficial in mid-capacity systems such as Malaysia and Vietnam, but plateauing or attenuating in mature regimes. Islamic banks demonstrate weaker responsiveness to governance reforms, reflecting contractual distinctiveness that standard prudential frameworks overlook. Post-COVID-19 interventions further attenuate capital’s profitability effect, underscoring the context-dependence of regulatory mechanisms. Integrating the Resource-Based View with Institutional Theory, the study advances a contingent resource-in-context framework in which capital functions as a portable safeguard while governance acts as an institution-dependent multiplier, offering regulators a basis for calibrating capital and governance policy asymmetrically.