The Role of Credit Risk in Shaping the Profitability of the Banking Sector in the World's Largest Economies: Evidence from Panel Quantile Regression

Emmanuel Ezekiel Mwanjilinji (), Twahil Hemed Shakiru () and Fei-Ming Huang ()
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Emmanuel Ezekiel Mwanjilinji: Jiangxi University of Finance and Economics
Twahil Hemed Shakiru: University of Dar es Salaam
Fei-Ming Huang: Jiangxi University of Finance and Economics

SN Business & Economics, 2025, vol. 5, issue 11, 1-30

Abstract: Abstract Credit risk remains a pivotal factor influencing the profitability and stability of the banking sector, particularly in the world’s largest economies. This study investigates the impact of credit risk, measured through non-performing loans (NPLs), on bank profitability using a panel quantile regression approach. Analyzing data from 17 largest economies by GDP between 2002 and 2020, the study explores the heterogeneous effects of credit risk across different profitability levels while considering key macroeconomic and financial control variables. The findings reveal a significant negative relationship between NPLs and bank profitability, particularly for institutions in the lower quantiles, indicating that less profitable banks are more vulnerable to credit risk. Additionally, the study highlights the adverse impact of cost inefficiencies and excessive lending on profitability, emphasizing the importance of stringent credit risk management practices. Regulatory capital requirements, while essential for financial stability, may also constrain profitability. Economic growth positively influences bank profitability, whereas inflation shows an insignificant effect. These results underscore the need for proactive risk mitigation strategies, effective cost management, and balanced regulatory policies to enhance banking sector resilience. The study provides valuable insights for policymakers, financial institutions, and regulators striving to foster financial stability and sustainable profitability in global banking.

Keywords: Credit risk; Banking sector stability; Non-Performing loans (NPLs); Quantile regression (search for similar items in EconPapers)
JEL-codes: C23 E44 G21 G28 G32 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s43546-025-00964-y

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