The impact of banking sector stability on the real economy

Salam

et al. 2019

SJMS

Risk management became an important dilemma in the banking literature and has gained consideration since the financial crisis of 2007-08 which brought numerous challenges for most organizations. More than 325 banks' failure was reported in the United States during the worldwide financial crisis. The high number of banks failures needs to evaluate the risk management efficiency of banking institutions of Pakistan. In this study, we used the PVAR model and Simultaneous equation approach to examine the link between Liquidity Risk and Credit Risk and its influence on banks' performance working in Pakistan. The panel data was collected from 33 banking institutions between the period 2008-2018. The results revealed that Credit Risk and Liquidity Risk are not interrelated with each other. However, the two risks independently influence the banks' performance and their relative interaction plays a major role in the instability of the banking sector. The findings form the foundation for recent regulatory exertions to better understand the two types of risks and to strengthen the joint management of both liquidity risk and credit risk.

Section: The Above Results Inmentioning

confidence: 99%

The nexus between credit risk and liquidity risk and their impact on banks financial performance: Evidence from Pakistan

Salam

et al. 2019

SJMS

International Review of Financial Analysis

“…The third proxy of stability used in this research is the distance-to-default model, a market-based credit risk measure. Recent literature in banking has adopted DD model as a proxy of stability because it overcomes the many problems accounting-based stability measures face (Anginer et al, 2014;Jokipii and Monnin, 2013;Koutsomanoli-Filippaki and Mamatzakis, 2009). The DD model is calculated using market information following the theory of Merton (1974) and Black and Scholes (1973).…”

Section: Distance-to-defaultmentioning

confidence: 99%

“…PVAR methodology combines the traditional VAR approach with a panel data approach that allows for unobserved individual heterogeneity. Many recent studies have employed PVAR estimation techniques to analyze the behavior of macroeconomic variables(Grossmann, Love, and Orlov, 2014;Jokipii and Monnin, 2013) between macroeconomic and bank-specific variables (Love and Turk Ariss, 2014) and in banking particularly(Koutsomanoli-Filippaki and Mamatzakis, 2009; Louhichi & Boujelbene, 2016;Saeed and Izzeldin, 2014) …”

mentioning

confidence: 99%

The ‘competition–stability/fragility’ nexus: A comparative analysis of Islamic and conventional banks

Kabir

Worthington

2017

149

119

The 'competition-stability/fragility' nexus is one of the more debated issues in the banking literature. However, while there is ample evidence concerning the relationship between competition and stability/fragility in different countries and regions, no prior study investigates this in the context of Islamic and conventional banks. We do this using data on both types of banks drawn from 16 developing economies over the period 2000-12. We measure the lack of competition using the Lerner index, and stability using both accountingbased measures, comprising the Z-score and the nonperforming loan ratio, and market-based measures, including Merton's distance to default. We employ panel vector autoregression and two-stage quantile regression to estimate the relationship. Our results lend support to the competition-fragility hypothesis in both Islamic and conventional banks. We also find the magnitude of the market power effect on stability is greater for conventional banks than Islamic banks. Lastly, banks in the median quantile of stability have a greater ability to reduce credit risk through gaining market power than banks in the lower and upper quantiles.

Journal of Business Economics and Management

“…Financial stability helps stakeholders manage their risks promptly and enables them to use their financial resources efficiently, which ultimately increases economic growth (Hoggarth et al, 2002;Jokipii & Monnin, 2013;Creel et al, 2015). In addition, some researchers argue that financial stability and economic growth reinforce each other.…”

Section: Related Literature and Research Focusmentioning

confidence: 99%

Linking Bank Competition, Financial Stability, and Economic Growth

Ijaz

Hassan

Tarazi

et al. 2020

This paper investigates the effect of bank competition and financial stability on economic growth by examining panel-data from 38 European countries over 2001 to 2017. Bank competition is measured with the Boone indicator, and bank stability with Z-scores and non-performing loan ratios, all at the country level. This study employs a fixed-effect estimator, as well as a system generalized method of moment (GMM) estimator to control unobserved heterogeneity, endogeneity, the dynamic effect of economic growth, and reverse causality in its estimation. Results show that bank stability significantly contributes to economic growth in Europe. Economic growth falls during crisis periods (both the global financial crisis and the local banking crisis), highlighting the importance of a resilient banking system during crisis periods. Moreover, empirical outcomes show that lower banking competition supports economic growth and increases financial stability. This study provides a framework for banks and regulators to boost economic growth through the channel of banking stability.