The Relationship between Credit Risk and Bank Financial Stability: The Mediating Role of Bank Profitability

Sang Tang My, Anh Nguyen Quoc

Abstract

This study aims to investigate the influence of credit risk on bank financial stability of Vietnamese commercial banks, understanding the impact channels and patterns of Vietnamese commercial banks in particular by proposing implications for solutions to reduce credit risks and promote financial stability for banks. We employed the POOL, FEM, REM, GMM techniques, and Monte Carlo approach and used secondary data collected from 2005 to 2019. The findings reveal a direct relationship between bank credit risk, profitability, and bank financial stability, as well as a partly indirect association. The above suggests that bank credit risk and bank profitability can explain the stability of the Vietnam commercial banking sector. In the first step, we examine the relationship between bank credit risk and bank profitability. The findings reveal that size and previous period profitability positively affect bank profitability, while non-performing loans, loan loss provision, non-interest income, efficiency, and bank credit growth positively correlate with bank profitability. Bank profitability does not affect bank credit risk. In the second phase, we examine the effects of bank profitability on bank stability. Regression results demonstrate that previous-period profitability and bank stability impact current-period bank financial stability. We test the impact of bank credit risk on bank financial stability in the third step, and the results suggest that non-performing loans, non-interest income, loan loss provision, and prior bank stability positively impact current bank financial stability. This study offers a new understanding of the channel's effect of credit risk on bank financial stability. The results indicated that the credit risk had a direct and partly indirect impact on bank financial stability.

 

Keywords: profitability, financial stability, bank credit risk, Monte Carlo approach, commercial bank.

 

https://doi.org/10.55463/issn.1674-2974.49.1.32

 


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