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Is bank risk appetite relevant to bank default in times of Covid-19?

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 esti...

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Detalles Bibliográficos
Autores principales: Lee, Pei-Ling, Lye, Chun-Teck, Lee, Chin
Formato: Online Artículo Texto
Lenguaje:English
Publicado: The Authors. Published by Elsevier B.V. on behalf of Central Bank of The Republic of Turkey. 2022
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9446075/
http://dx.doi.org/10.1016/j.cbrev.2022.08.003
Descripción
Sumario: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).