Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297951 
Year of Publication: 
2022
Citation: 
[Journal:] Central Bank Review (CBR) [ISSN:] 1303-0701 [Volume:] 22 [Issue:] 3 [Year:] 2022 [Pages:] 109-117
Publisher: 
Elsevier, Amsterdam
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).
Subjects: 
Bank risk appetite
COVID-19
Default
ESG
Merton
Risk-taking
JEL: 
G00
G10
G21
G32
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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