How Vulnerable are Commercial Banks to Macroeconomic Shocks? The Case of Bangladesh

34 Pages Posted: 18 Aug 2017 Last revised: 26 Sep 2017

See all articles by Md. Atiqur Rahman Khan

Md. Atiqur Rahman Khan

Rajshahi University - Dept. of Finance

M. Shibley Sadique

Rajshahi University

I.K.M. Mokhtarul Wadud

Deakin University - School of Accounting, Economics and Finance

Date Written: August 18, 2017

Abstract

Innovative financial products and services of commercial banks increase the exposure to liquidity, market and operational risks resulting in the banks facing vulnerable circumstances. Even the smallest unexpected loss, with a low capital to assets ratio, tends to jeopardise the survival of the banks in developing economies. In addition, banking crises due to financial instability can be very costly for any economy in terms of systematic disruption and contraction of activities in other industries. In view of these concerns, this study examines the impact of macroeconomic dynamics on credit risk of commercial banks in Bangladesh and assesses the extent of default rate in the banking system as a result of adverse macroeconomic shocks.

In order to identify the comprehensiveness of structural shocks, applying a VAR model in this study we impose sign-restricted 99th percentile value to disseminate shocks for each variable. The study finds that in extreme adverse inflation situations, contractionary monetary policy, and unexpected increase in exchange rate gap can boost the default rate by over 1%, 0.57% and 0.92% respectively. In addition, if all the extreme historical events occur for all macroeconomic variables, the default rate would increase by 2.52% after a lag. It indicates, adverse economic condition can threaten the banking sector in Bangladesh. From the operational and regulatory perspective of banks, our findings are motivating. The results might help the policy makers to focus on the key macro variables for smooth operation and stability of the banking system.

Suggested Citation

Khan, Md. Atiqur Rahman and Sadique, M. Shibley and Wadud, I.K.M. Mokhtarul, How Vulnerable are Commercial Banks to Macroeconomic Shocks? The Case of Bangladesh (August 18, 2017). Available at SSRN: https://ssrn.com/abstract=3021731 or http://dx.doi.org/10.2139/ssrn.3021731

Md. Atiqur Rahman Khan

Rajshahi University - Dept. of Finance ( email )

Rajshahi
Rajshahi, 6205
Bangladesh
+8801914254354 (Phone)

M. Shibley Sadique

Rajshahi University ( email )

Motihar Chattar, Boalia
Rajshahi, Rajshahi 6205
Bangladesh

I.K.M. Mokhtarul Wadud (Contact Author)

Deakin University - School of Accounting, Economics and Finance ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia
+61 3 522 72051 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
44
Abstract Views
390
PlumX Metrics