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

Sang Tang My, Anh Nguyen Quoc


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.


Full Text:



FAISAL A., and MASOOD O. How Do Large Commercial Banks Adjust Capital Ratios: Empirical Evidence from the US? Economic Research-Ekonomska Istraživanja, 2020, 33(1): 1849-66.

ABDULLAH H., and VALENTINE B. Fundamental and Ethics Theories of Corporate Governance. Middle Eastern Finance and Economics, 2009, 4(4): 88-96.

ABREU M., and MENDES V. Commercial Bank Interest Margins and Profitability: Evidence for Some Eu Countries. Research in Economics and Mathematics. Preliminary draft. 2001. [Online] Available from:

AGNELLO L., CASTRO V., and SOUSA R.M. The Housing Cycle : What Role for Mortgage Market Development and Housing Finance? Journal of Real Estate Finance and Economics, 2020, 61(3): 607-670.

ALSHUBIRI F.N. Determinants of Financial Stability: An Empirical Study of Commercial Banks Listed in Muscat Security Market. Journal of Business and Retail Management Research, 2017, 11(4): 192-200.

BERGER A.N., and DEYOUNG R. Problem Loans and Cost Efficiency in Commercial Banks. Journal of Banking and Finance, 1997, 21.

BILLETT M.T., GARFINKEL J.A., and YU M. The effect of asymmetric information on product market outcomes. Journal of Financial Economics, 2017. 123: 357-376.

BOURKE P. Concentration and Other Determinants of Bank Profitability in Europe, North America and Australia, Journal of Banking and Finance, 1989, 13(1): 65-79.

DEMSETZ, and ALCHIAN A.A.H. The property right paradigm. The journal of economic history, 1973, 33(1), 16-27.

DIACONU R.I., and OANEA D.C. The Main Determinants of Bank’s Stability. Evidence of Romanian Banking Sector. Procedia Economics and Finance, 2014, 16(5): 329–335.

DIETRICH A., and WANZENRIED G. Determinants of Bank Profitability before and during the Crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions & Money, 2011, 21(3): 307-27.

NOMAN A.H.MD, PERVIN S., CHOWDHURY M.M. and BANNA H. The Effect of Credit Risk on the Banking Profitability: A Case on Bangladesh. Global Journal of Management and Business Research: C Finance, 2015, 15(3).

AMENI G., CHAIBI H., ALI M., and OMRI B. The Effects of Liquidity Risk and Credit Risk on Bank Stability: Evidence from the Middle East & North Africa Region. Borsa Istanbul Review, 2017, 17(4): 238-248.

MESSAI A., GALLALI M., and JOUINI F. Determinants of Bank Profitability in Western European Countries Evidence from System GMM Estimates. International Journal of Business Research, 2015, 8(7): 30-42.

GODDARD J., MOLYNEUX P., and WILSON J.O.S. The profitability of European banks: a cross-sectional and dynamic panel analysis. The Manchester School, 2004, 72(3): 363-381.

MUYA B. Impact of interest rate capping on loan granting by listed commercial banks in Kenya. United States International University-Africa, 2019.

ATHANASOGLOU P., MANTHOS D, and STAIKOURAS C. Determinants of bank profitability in the south eastern european region. Munich Personal RePEc Archive, 2008. [Online] Available from:

ISAM S., and AFIFA M.A. The effect of credit risk, liquidity risk and bank capital on bank profitability: Evidence from an emerging market. Cogent Economics & Finance, 2020, 8(1).


  • There are currently no refbacks.