The determinants of bank insolvency risk: evidence from Finland

Abstract

Purpose

This paper aims to contribute to the literature on the determinants of bank-specific insolvency risk.

Design/methodology/approach

By applying a dynamic two-step System GMM estimator on a novel, representative panel of 339 Finnish unlisted cooperative and savings banks over the period 2002-2018.

Findings

This study contributes to the literature on the determinants of bank-specific insolvency risk by applying a dynamic two-step System GMM estimator on a novel, representative panel of 339 Finnish unlisted cooperative and savings banks over the period 2002-2018. The key findings suggest that Finnish banks have become less fragile under the renewed EU banking regulation. In particular, the CRD IV has affected banks’ equity levels. This study also captures the detrimental effect of cost inefficiency as well as a positive relationship between the income diversification and insolvency risk. A negative relationship between the GDP growth rate and the insolvency risk is also reported although results suggest that the effect is not immediate.

Originality/value

This result is discussed together with other macroeconomic factors. The consequent conclusion underlines the fundamental significance of overall macroeconomic dynamics. From the perspective of regulatory harmonization, more research is needed to address the level of homogeneity of macroeconomic dynamics between different geographical and cultural regions.

Citation

Huhtilainen, M. (2020), "The determinants of bank insolvency risk: evidence from Finland", Journal of Financial Regulation and Compliance, Vol. 28 No. 2, pp. 315-335. https://doi.org/10.1108/JFRC-02-2019-0021