Multi-Country Study of Bank Credit Risk Determinants

Abstract

This paper presents fresh findings about key determinants of credit risk of commercial banks in emerging economy banking systems compared with developed economies. Australia, France, Japan and the US represent developed economies; emerging economies are India, Korea, Malaysia, Mexico and Thailand. Credit risk theories and empirical literature suggest eight credit risk determinants. We find anywhere from two to four factors are alone significantly correlated with credit risk of any one banking system. Regulatory capital is significant for banking systems that offer multi products; management quality is critical in the cases of loan-dominant banks in emerging economies. Contrary to theory or studies, we find leverage is not correlated with credit risk in our test period. Data transformations and statistical corrections ensured these results are reliable: Model robustness was tested using AIC. The model developed here could be applied to test more emerging economy banking systems to generalize our findings to other economies.

Keywords

• Bank risk management
• credit risk
• regulatory capital
• emerging economies