Citation

Lee, Pei Ling and Lye, Chun Teck and Lee, Chin (2022) Is bank risk appetite relevant to bank default in times of Covid-19? Central Bank Review, 22 (3). pp. 109-117. ISSN 1303-0701

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Abstract

The paper aims to analyze the effect of bank risk appetite on banks' default probabilities during the year of COVID-19 in 12 countries while controlling for bank-specific and country-specific effects over time. A System Generalized Methods of Moments (GMM) model of default probabilities is estimated over the periods 2010–2021. This study confirms the ‘risk-mitigation view’, in which banks with higher ESG scores are more prudent in lending and have better relationship management, reducing the probability of bank default. Underperforming banks tend to have a higher portion of risky loans in their credit portfolio and therefore demonstrating a higher default propensity. Bank risk appetite, ESG, asset quality, economic growth, and currency depreciation appear to be material drivers for bank risk. We find that a lower risk appetite ratio (corresponding to higher risk appetite) is associated with higher estimated default probability during the COVID-19 outbreak, identified through interaction with a single time dummy for 2020 (the break-out year of the pandemic).

Item Type:	Article
Uncontrolled Keywords:	Bank risk appetite, Risk-taking, Default, Merton, ESG, COVID-19
Subjects:	H Social Sciences > HG Finance > HG8011-9999 Insurance > HG9371-9399 Health insurance
Divisions:	Faculty of Business (FOB)
Depositing User:	Ms Nurul Iqtiani Ahmad
Date Deposited:	07 Oct 2022 01:44
Last Modified:	07 Oct 2022 01:44
URII:	http://shdl.mmu.edu.my/id/eprint/10488

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