DETERMINANTS OF RISKS: EVIDENCE FROM ASIA’S FINANCIAL INSTITUTIONS

Abstract

This paper examines how three dimensions of risks that financial institutions face are affected by a set of firm specific variables. In particular, we focus on credit risk, liquidity risk and insolvency risk and use capital, charter value, size, loan growth and the share of non-interest income to explain the aforementioned risks. Using a panel of financial institutions coming from 12 Asian countries from 2004-2013, we found significant non-linear relationships between the variables and risk. All firm specific variables exhibited a U shape or inverted U shape association with at least one measure of risk. These findings suggest that more of a factor variable may change the association it has with risk. For instance, capital did not reduce credit or insolvency risk beyond its turning point. In addition, we find that the type of financial institution, the level of economic development of a country and the financial structure of a country will affect the relationship between determinants and risk. In particular, the set of firm specific variables used had the best explanatory power over risks in commercial banks, developed and bank-based countries. In contrast, significantly fewer associations were found between the variables and risk in investment banks, developing and market-based countries. Lastly, our results are robust to the exclusion of Japan from our sample. The relationships also hold both before and after the global financial crisis.