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

Pei-Ling Lee, Chun-Teck Lye and Chin Lee ()

Central Bank Review, 2022, vol. 22, issue 3, 109-117

Abstract: 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). ######### keywords

Keywords: Bank risk appetite; Risk-taking; Default; Merton; ESG; COVID-19 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:cebare:v:22:y:2022:i:3:p:109-117

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