On the dynamics of bank capital adjustment: What do we know about dual banking economies?

Purpose This study aims to investigate the dynamics of bank capital adjustment in dual-banking economies. It examines whether adjustment behavior differs between Islamic and conventional banks and whether bank ownership affects the convergence towards target capital ratios. Design/methodology/approach The study uses an unbalanced panel of 349 commercial banks from 13 dual-banking economies over 2011–2024. A dynamic partial-adjustment model is estimated through two-step System Generalized Method of Moments. Five capital measures are examined: leverage ratio, tier 1 leverage ratio, regulatory ratio, tier 1 regulatory ratio and common equity regulatory ratio. Findings The results indicate that capital-adjustment speed differs across capital measures and bank types. The estimated adjustment speeds are higher for risk-weighted regulatory ratios than for unweighted leverage ratios, a pattern consistent with greater use of risk-weighted-asset management, although the underlying balance-sheet channel is not directly identified. Islamic banks adjust leverage ratios faster than conventional banks, while conventional banks adjust regulatory capital ratios faster than Islamic banks. Public banks display more gradual convergence in the reported specifications, whereas private banks show lagged coefficients above one in selected regulatory-ratio models, which is consistent with an overshooting pattern. Profitability, liquidity, loan-loss reserves, bank size, ownership, macroeconomic conditions and the COVID-19 period have heterogeneous relationships with the capital measures and subsamples. These results should be interpreted as conditional evidence from an observational, unbalanced panel rather than as causal estimates. Originality/value The study extends dual-banking research by analyzing dynamic capital adjustment across multiple leverage-based and risk-weighted capital measures. It also shows that Islamic banking status and ownership structure shape the capital-adjustment process differently. The findings support differentiated prudential regulation that recognizes the distinct balance-sheet structures and adjustment constraints of Islamic, conventional, public and private banks.