Lending structure and insolvency risk of malaysian banks

A sensitivity analysis

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This study provides empirical evidence for the theory of bank's insolvency risk using four lending structure models as in Aisyah et al. (2009). Revisiting similar issue, we conduct a sensitivity analysis to explore whether the previous findings are susceptible towards different time frame and the inclusion of macroeconomic and profitability variables. Consistent to previous findings, we find that insolvency risk is driven by real estate lending and lending concentration even though the magnitudes of the relationship change insignificantly. Surprisingly, the stability of lending structure in the short run shows a contradicting sign of direction. By controlling the macroeconomic and profitability variables, we find that a stable lending structure in the short-run helps to lessen the insolvency risk exposure because as banks maintain their lending portfolio within a one-year period; they can better monitor and manage risk, especially when they are at a transitions of the economic cycle and financial landscape. In summary, real estate and concentrated lending increases bank's insolvency risk, but the impact could be softened by a stable lending structure in the short-run. Our results support the interpretation that the increasing property prices can jeopardize the banking institutions in Malaysia. Thus, the authorities should take immediate action to impede the current amplifying real estate price bubbles while at the same time reinforce the risk management framework for the banking sector concerning real estate lending.

Original languageEnglish
Pages (from-to)16-36
Number of pages21
JournalInternational Journal of Business and Society
Volume12
Issue number2
Publication statusPublished - Dec 2011

Fingerprint

Insolvency risk
Lending
Sensitivity analysis
Real estate
Short-run
Macroeconomics
Profitability
Authority
Economic cycles
Banking sector
Property prices
Inclusion
Risk exposure
Empirical evidence
Banking
Malaysia
Risk management
Price bubbles

Keywords

  • Commercial banks
  • Insolvency risk
  • Lending structure

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance
  • Strategy and Management
  • Business and International Management

Cite this

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abstract = "This study provides empirical evidence for the theory of bank's insolvency risk using four lending structure models as in Aisyah et al. (2009). Revisiting similar issue, we conduct a sensitivity analysis to explore whether the previous findings are susceptible towards different time frame and the inclusion of macroeconomic and profitability variables. Consistent to previous findings, we find that insolvency risk is driven by real estate lending and lending concentration even though the magnitudes of the relationship change insignificantly. Surprisingly, the stability of lending structure in the short run shows a contradicting sign of direction. By controlling the macroeconomic and profitability variables, we find that a stable lending structure in the short-run helps to lessen the insolvency risk exposure because as banks maintain their lending portfolio within a one-year period; they can better monitor and manage risk, especially when they are at a transitions of the economic cycle and financial landscape. In summary, real estate and concentrated lending increases bank's insolvency risk, but the impact could be softened by a stable lending structure in the short-run. Our results support the interpretation that the increasing property prices can jeopardize the banking institutions in Malaysia. Thus, the authorities should take immediate action to impede the current amplifying real estate price bubbles while at the same time reinforce the risk management framework for the banking sector concerning real estate lending.",
keywords = "Commercial banks, Insolvency risk, Lending structure",
author = "{Abdul Rahman}, Aisyah",
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AB - This study provides empirical evidence for the theory of bank's insolvency risk using four lending structure models as in Aisyah et al. (2009). Revisiting similar issue, we conduct a sensitivity analysis to explore whether the previous findings are susceptible towards different time frame and the inclusion of macroeconomic and profitability variables. Consistent to previous findings, we find that insolvency risk is driven by real estate lending and lending concentration even though the magnitudes of the relationship change insignificantly. Surprisingly, the stability of lending structure in the short run shows a contradicting sign of direction. By controlling the macroeconomic and profitability variables, we find that a stable lending structure in the short-run helps to lessen the insolvency risk exposure because as banks maintain their lending portfolio within a one-year period; they can better monitor and manage risk, especially when they are at a transitions of the economic cycle and financial landscape. In summary, real estate and concentrated lending increases bank's insolvency risk, but the impact could be softened by a stable lending structure in the short-run. Our results support the interpretation that the increasing property prices can jeopardize the banking institutions in Malaysia. Thus, the authorities should take immediate action to impede the current amplifying real estate price bubbles while at the same time reinforce the risk management framework for the banking sector concerning real estate lending.

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