Jul 2026· The Indian Economic Journal· 0 citations· 23 references
Abstract
Banks’ role as financial intermediaries necessitates the use of financial derivatives for trading and hedging, and exposes banks to the probability of default. This unattended default probability, along with the external risk exposure of banks, translates into contagious risk. This three-dimensional effect between derivative usage, external risk and default probability leads to economic failure. Studies rarely address the fact that derivatives are an intermediary (moderator), used to either transfer or diversify the risk absorbed through financial intermediation. This article aims to identify the moderating impact of derivatives on the relationship between banks’ probability of default and banks’ risk exposures. The study involves data from 110 commercial banks between 2005 and 2019 to perform a moderation effect on pooled panel data. Results show that the hedged derivatives, along with the market risk factor and the exchange rate risk factor, have a significant moderating effect on the default probability of banks. It is further identified that the default probability of a systemically important bank is linked to the default of its financial system of home or parent country (D-SIB) rather than global economic system.
JEL Codes:
G21, G32, G23, O50
This research investigates how liquidity creation induces moral hazard behavior and affects credit quality in Indonesian commercial banks. This study examines the effect of liquidity creation, liquidity risk, and central bank policies on credit risk in Indonesian commercial banks, proxied by the non-performing loan (NPL) ratio. Using panel data from 46 banks listed on the Indonesia Stock Exchange over 2015–2024, we apply the Two-Step System Generalized Method of Moments (SYS-GMM) to address endogeneity inherent in dynamic panel models. Results indicate that liquidity creation has a significant positive effect on NPL, consistent with the moral hazard hypothesis. Liquidity risk (LDR) also significantly and positively affects NPL. Reserve requirements (GWM) and BI-Rate do not produce a direct and significant effect on NPL. Return on assets (ROA) significantly and negatively affects NPL. These results suggest that credit risk in Indonesian commercial banking is predominantly influenced by bank-level intermediation behavior rather than by macroeconomic or policy variables. The research concludes that excess liquidity conditions incentivize aggressive credit expansion without proportionate attention to borrower quality, particularly in an oligopolistic market structure with implicit state guarantees.
Jeffry Fauzan, Dewi Hanggraeni· Eduvest - Journal Of Univers...· 0 citations
Structured retail products are unsecured bonds subject to the default risk of the issuer. We analyze the price‐setting policy of issuers with respect to this default risk. Using a long‐term data set of discount certificates in the German market, we apply a time series IVX‐approach to find that (i) quoted prices do depend on issuer default risk, but (ii) this dependency is under‐proportional. Hence, retail investors are only partially compensated for bearing issuer default risk. A long‐term analysis covering the global financial crisis, the European debt crisis, and the succeeding calm period, as well as supporting evidence from the coronavirus crisis, provides patterns consistent with a fading attention hypothesis: When default risk has left the focus of retail investors, they are no longer compensated for it, even if it becomes substantial, as in the early months of the coronavirus crisis.
R. Baule, Falk Jensen· Journal of futures markets· 0 citations
This article surveys recent theoretical and empirical advancements on the impact of interest rates on bank valuations and stability—two crucial concerns for financial researchers, policy makers, and regulators. We begin by highlighting the distinctive feature of the regional banking crisis of 2023—the prevalence of liquid assets on bank balance sheets—in contrast to earlier crises such as the savings and loan crisis of the 1980s and 1990s, where illiquid assets contributed to banking failure. In Section 2, we present a theoretical framework that integrates both asset illiquidity and the risk of self-fulfilling solvency runs on the deposit franchise. We show the conditions under which the deposit franchise fails to hedge asset declines due to rising interest rates and demonstrate how and why this amplifies bank fragility. Sections 3–5 explore empirical methods for assessing these effects. We review approaches to measuring the interest rate sensitivity of bank asset values, highlighting their limitations. We also examine recent advances in quantifying bank fragility, particularly the challenges of valuing the deposit franchise under both stable conditions and crisis scenarios. Additionally, we discuss new measures of bank fragility that capture the potential endogenous collapse of franchise value during crises. Applying these measures leads us to conclude that US banks face significant unhedged interest rate exposure in their asset portfolios. When combined with their high leverage, this exposure substantially increases the risk of solvency runs. Liquidity interventions, while useful in the short term, are insufficient for addressing the systemic risks posed by this vulnerability.
E. Jiang, Gregor Matvos, T. Piskorski et al.· Annual Review of Financial E...· 0 citations
The significance of risk management and disclosure in the banking sector has garnered increasing
attention in recent years, as financial institutions strive to enhance transparency and improve
investor confidence. This study investigates the effect of quantitative risk disclosures—specifically
credit risk, market risk, and liquidity risk on the market value of listed commercial banks in Nigeria.
The study adopts a longitudinal research design, analyzing secondary data collected from the
audited annual reports and accounts of 15 Deposit Money Banks (DMBs) listed on the Nigerian
Exchange Group (NGX) over a ten-year period (2014–2023). Dynamic panel regression analysis
is employed as the primary technique for data analysis. The findings reveal that credit risk has a
positive and significant effect on market value. In contrast, market risk shows a negative but
statistically insignificant effect on market value. Liquidity risk demonstrates a positive and
significant relationship with market value. Based on these findings, the study recommends that
banks improve the transparency of their credit risk, market risk, and liquidity risk disclosures to
enhance investor confidence and increase their market value
Aisha Sulaiman· IIARD INTERNATIONAL JOURNAL...· 0 citations
This study examines the effects of liquidity risk and credit risk on the stability of Nepalese commercial banks. Return on assets and Altman Z-score are the selected dependent variables. The selected independent variables are non-performing loan, capital adequacy ratio, bank size, loan-to-deposit ratio, debt-to-equity ratio, interest rate spread and loan loss provision. The study is based on secondary data of 12 commercial banks with 120 observations for the study period from 2014/15 to 2023/24. The data were collected from Bank Supervision Report published by Nepal Rastra Bank (NRB) and annual reports of the selected commercial banks. The correlation coefficients and regression models are estimated to test the significance and importance of liquidity risk and credit risk on the stability of Nepalese commercial banks. The study showed that non-performing loan has a negative impact on Z-score and return on assets. It implies that increase in nonperforming loan leads to decrease in Z-score and return on assets. In addition, capital adequacy ratio has a positive impact on Z-score and return on assets. It implies that increase in capital adequacy ratio leads to increase in Z-score and return on assets. However, bank size has a negative impact on Z-score and return on assets. It shows that increase in bank size leads to decrease in Z-score and return on assets. Likewise, loan to deposit ratio has a negative impact on Z-score and return on assets. It implies that increase in loan to deposit ratio leads to decrease in Z-score and return on assets. Similarly, debt to equity ratio has a negative impact on Z-score and return on assets. It implies that increase in debt-to-equity ratio leads to decrease in Z-score and return on assets. In addition, interest rate spread has a positive impact on Z-score and return on assets. It implies that increase in interest rate spread leads to increase in Z-score and return on assets. However, loan loss provision has a negative impact on Z-score and return on assets. It shows that increase in loan loss provision leads to decrease in Z-score and return on assets.
Lelina Pokhrel· Nepalese Journal of Economic...· 0 citations
The profitability of a country’s banking sector is a critical indicator of its overall economic health. This study examines the impact of financial risk on the performance of the banking sector in India, with a specific focus on identifying the moderating factors that influence this relationship. Using data from 26 Indian banks listed on the stock exchange from 2012 to 2023, the research employs fixed effects regression to investigate the relationship between financial risk and performance. Return on assets (ROA) and return on equity (ROE) were used as the key indicators of financial performance. The independent variables include credit risk (CR), capital adequacy ratio (CAR), liquidity risk (LR), loan-to-deposit ratio (LDR), interest rate risk (IRR), and market risk (MR). The results indicate a significant effect of financial risk on the financial performance of banks, with varying levels of significance at different risk levels. Furthermore, moderated regression analysis was applied to examine the effect of various macroeconomic and bank-specific moderating factors on the association between financial performance and financial risk. The findings provide valuable insights into the risk-performance dynamics within the Indian banking sector.
Harsha Motyani, R. Kothari· International Journal of Ban...· 0 citations
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