The impact of credit and liquidity risk on the likelihood of a bank default

: a study on european commercial banks during the 2012-2021 period

Abstract

The present Dissertation investigates the impact of credit and liquidity risk on European commercial banks' default probability in the period 2012 to 2021 during which the European Central Bank implemented its asset purchase program (APP) and other unconventional monetary policy tools. The likelihood of bank default is here measured by the z-score, while credit risk is proxied by the Loan Loss Provision ratio and the liquidity risk by three different measures: (i) Net Loans to Total Asset ratio,(ii) Interbank Ratio and (iii) Liquid Assets to Total Assets ratio. Moreover, a robustness test on credit risk is performed. The results reveal that credit risk significantly affects the likelihood of bank default while liquidity risk does not. In particular, the higher the credit risk a bank supports, the higher the bank's default probability. One explanation of the liquidity risk's results might be related to the impact of the ECB (through Zero Lower Bound, some distinctive unconventional monetary policies, and/or provisions of Basel III). Furthermore, the present Dissertation provides a thorough discussion of how unconventional monetary policies (i.e., OMT and QE programs) and the Basel III provisions could have affected banks' default probability. In particular, a dummy variable is also added to the main model in order to address the role of the Quantitative Easing policy. The results show that Quantitative Easing is not the main driver of the non-impact of the liquidity risk measure and hence bank risk-taking has also been influenced by other macroeconomic variables.

Date of Award	19 Oct 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diptes Chandrakante Prabhudas Bhimjee (Supervisor)