Do firm-specific risks affect bank performance?
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 4 November 2020
Issue publication date: 17 February 2022
Abstract
Purpose
The authors examine the impact of credit, liquidity and operational risks on the financial performance of commercial banks of South Asia.
Design/methodology/approach
Data are extracted from DataStream of 76 commercial banks of four countries, i.e. Pakistan, India, Bangladesh and Sri Lanka for the period 2009–2018. The generalized method of moments (GMM) is used to analyze the results.
Findings
All three risks are significantly associated with financial performance. The authors find that Z-score positively affects the bank performance, whereas the nonperforming loans (NPLs) ratio has a negative impact on financial performance of bank. Liquidity risk analyses show the current and loan-to-deposit (LTD) ratios positively and negatively, respectively, affect financial performance. While operational risk positively affects financial performance. The authors further present the significant effects of joint occurrence of credit and liquidity risks on financial performance.
Practical implications
For managing credit risk, banking management should ensure the policies for granting loans and timely reimbursement of the loan installments from customers. Bank managers should regularly monitor the liquidity position by maintaining the necessary levels of loans and deposits. Management should retain a healthy capital charge to meet operational risks.
Originality/value
Credit, liquidity and operational risks are considered the most important categories of risk which are faced by financial institutions. To the best of the authors’ knowledge, this is the first study which investigates the impact of these risks on banks’ financial performance in selected South Asian countries. The results of this study have relevance and probable generalizability about the impact of risks on the performance of banks in emerging markets.
Keywords
Acknowledgements
The authors acknowledge the anonymous referees, senior subject editor and editor in chief for their constructive feedback to improve the quality of their work.
Citation
Hunjra, A.I., Mehmood, A., Nguyen, H.P. and Tayachi, T. (2022), "Do firm-specific risks affect bank performance?", International Journal of Emerging Markets, Vol. 17 No. 3, pp. 664-682. https://doi.org/10.1108/IJOEM-04-2020-0329
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited