From Stability to Collapse: Investigating the Determinants of Bank Crises in Upper Middle-Income Nations

Abstract

This study examines the factors leading to bank crises in upper-middle-income countries by analyzing macroeconomic banking factors and financial indicators unique to individual banks. Using data from the WDI, it employs panel data regression analysis from 2001 to 2020 to assess how key macroeconomic factors, such as financial system deposits to GDP, deposit money banks' assets to GDP, and central bank assets to GDP, influence bank crises (NPL). Additionally, the study investigates how bank-specific attributes like net interest margin, noninterest income to total income, overhead costs to total assets, and return on equity (ROE) impact loan performance and credit risk management. By examining these factors collectively, the research offers insights into how financial institutions and policymakers can develop strategies to reduce credit risk, improve regulatory frameworks, and bolster banking sector resilience, ultimately contributing to the prevention of crises and sustainable economic growth. The results indicate that deposit money banks' assets to GDP, higher net interest margins, and higher ROE contribute to lower NPL, suggesting that well-capitalized banks manage credit risk more effectively. However, the increase in deposit money banks' assets to GDP has led to greater market concentration and higher non-performing loans, pointing to riskier lending practices. Meanwhile, central bank assets, net interest income, and bank deposits do not significantly impact the level of non-performing loans. These findings can assist policymakers and banking institutions in developing effective risk-management strategies to prevent future financial crises.

Keywords:

NPL, ROE, Financial System Deposit to GDP, Bank Crisis