Capital, Liquidity, Profitability, and Credit Risk Nexus: A Panel VAR Study on Selected Developing Countries

Abstract

A banking system is essential for financial stability, especially economic growth and development. The authors investigate the dynamic linkage of key banking system stability measures, namely, liquidity, capital, profitability, and credit risk. To this end, the authors employ Panel Vector Autoregressive (VAR) to a panel data set of country-level banking system indicators from seven developing countries; from March 2010 to December 2020 (308 country quarter observations). A nation is selected on the basis of similar characteristics large and bank-based economy with the considerably same stage of economic development. The authors find a remarkable resilient feature of the banking system in which both liquidity risk and credit risk appears significant only in the short run (within three quarters). Shocks from both risk sources dissipate quickly, suggesting an internal mechanism is at work. This study provides evidence of how a good performance of financial safety net should be.

Citation

Ariefianto, M.D. and Trinugroho, I. (2023), "Capital, Liquidity, Profitability, and Credit Risk Nexus: A Panel VAR Study on Selected Developing Countries", Barnett, W.A. and Sergi, B.S. (Ed.) Macroeconomic Risk and Growth in the Southeast Asian Countries: Insight from SEA (International Symposia in Economic Theory and Econometrics, Vol. 33B), Emerald Publishing Limited, Leeds, pp. 149-164. https://doi.org/10.1108/S1571-03862023000033B010