The Effects of Risks on the Stability of Tunisian Conventional Banks

Abstract

This paper examines the impact of credit risk, liquidity risk, and operational risk on Tunisian bank stability. These major risks continue to threaten Tunisian banks which are still developing traditional activities, despite the exhaustion of the main factors that have long sustained banking intermediation. To do this, we used data from all conventional banks operational during the period 2005-2015 and we used panel data analysis. Empirical results show that the stability of banks is closely linked to factors specific to them. It depends positively and significantly on their profitability and their liquidity risk, and negatively and significantly on their size and the interaction of both credit and liquidity risks. As for the credit risk, it has no significant impact on the stability of banks when the latter is proxied by Z-score (ROE), but it becomes detrimental in the case of Z-score (ROE). These results could be of great importance for bank managers to draw appropriate strategies in order to manage various risks facing their banks, to know how to enhance their profitability, to make adequate restructurings to enlarge their size and to rely on highly qualified managers and staff who know how to coordinate various actions and manage large institutions. Contribution/ Originality:This study is one of very few which have investigated the impact of three types of risks, incorporated in the same econometric model, on all conventional Tunisian banks using a recent database. INTRODUCTIONIn developed countries, the bank plays a dual role. It is both a financial intermediary and a service provider. By using its balance sheet, the bank provides loans to deficit agents and collects resources, mainly in the form of deposits, from surplus agents. These operations constitute the core of balance sheet intermediation. Similarly, banks intervene in various capital markets to balance their cash, limit their risks, manage portfolios of financial securities, and so on. These activities, not exclusive of others, constitute market intermediation. As a service provider, the bank provides to its customers different means of payments and takes care of their management, gives both exchange and securities services, provides advice on asset management and private banking, and offers financial engineering services, etc. However, in developing countries, the two functions are unevenly developed. The intermediation function outweighs the service delivery function. More importantly, banks continue to play a leading role in financing those Asian Economic and Financial Review

Bank Specific Risks and Financial Stability Nexus: Evidence From Pakistan

“…The study used 180 observations from 15 banks in Pakistan. The mean value of the z-score (which represents the banks' stability) is very low as compared to values reported in the literature from different countries, like Adusei (2015) reported 2.29 the value of the z-score of Ghana banks while (Zaghdoudi, 2019) reported 20.87 for Tunisian banks, which is very high and shows the stability of banks. Our value of 0.9161 revealed that our banks are less stable.…”

“…Among these, many studies revealed that credit risk reduces the banks' stability (Acharya and Mora, 2013;Rajhi and Hassairi, 2013;Khemais, 2019;Djebali and Zaghdoudi, 2020). Besides these, many studies find no significant influence of credit risk on banks' stability (Amara and Mabrouki, 2019;Zaghdoudi, 2019). Based on the above discussion, we hypothesized:…”

“…Since the global financial crisis of 2007/2008 and the recent Covid-19 pandemic, numerous studies have been conducted to disclose the different factors explaining the financial stability of the banking sector (Adusei, 2015;Diallo et al, 2015;Ghenimi et al, 2017;Ali et al, 2019;Barra and Zotti, 2019;Zaghdoudi, 2019;Djebali and Zaghdoudi, 2020;Gupta and Kashiramka, 2020;Kim et al, 2020;Mutarindwa et al, 2020;Nair and Anand, 2020;Feghali et al, 2021;Lesmana, 2021;Malik et al, 2021). These studies used several factors as determinants of banks stability, such as funding risk (Adusei, 2015), credit, liquidity, and operational risk (Diallo et al, 2015;Zaghdoudi, 2019), Corporate governance (Subhani and Zeb, 2021), Governance quality and financial inclusion (Malik et al, 2021), Bank size (Ali et al, 2019) and Accounting (Bischof et al, 2020). Besides these factors, several studies used macroeconomic factors as determinants of bank stability, such as political stability (Djebali and Zaghdoudi, 2020), bank market structure (Feghali et al, 2021), monetary policy (Nair and Anand, 2020), corruption (Ali et al, 2019), and economic policy uncertainty (Phan et al, 2020).…”

Financial Risk Management in 2020's Recession: Evidence from ASEAN Countries

“…A further research by Ghenimi et al (2017) proved that bank size has a positive and significant effect on credit risk. In addition, according to Zaghdoudi (2019) and Ghenimi et al (2017), bank size also had a negative and significant effect on bank stability. H 8 : Bank size affects liquidity risk.…”

“…Setiawan and Widiastuti (2019) examined the effect of credit risk and liquidity risk individually or simultaneously on bank stability in Indonesia; 5. Zaghdoudi (2019) examined the effect of credit risk, liquidity risk, and operational risk on bank stability in Tunisia; 6. Djebali and Zaghdoudi (2020) examined the effect of the threshold effect of liquidity risk and credit risk on bank stability in the MENA region.…”