Country risk factors and banking sector stability

Heliyon 9 (2023) e20398
Contents lists available at ScienceDirect
Heliyon
journal homepage: www.cell.com/heliyon
Country risk factors and banking sector stability: Do countries’

income and risk-level matter? Evidence from global study
Seyed Alireza Athari a, Farid Irani b, *, Abobaker AlAl Hadood c
a
Department of Business Administration, Faculty of Economics and Administrative Sciences, Cyprus International University, Northern Cyprus,
Turkey
b
Faculty of Economic and Administrative Science, Final International University, Turkish Republic of Northern Cyprus, Turkey
c
Department of Banking and Finance, University of Zawia, Libya
A R T I C L E I N F O A B S T R A C T
JEL classification: Extant literature suggests the essential role of a country’s vulnerability in decreasing the stability
G20 of the banking sectors. However, the effect of country-specific risks on banking sector stability
G21 remains largely understudied. This study specifically examines the impact of country risk,
G28
encompassing political, economic, and financial risks, on the banking sector stability from a
Keywords: global perspective. Furthermore, we attempt to provide more insight by answering how this
Banking sector
relationship varies by grouping countries based on income and risk levels. To achieve this pur
Stability
pose, we focus on 107 countries and employ a dynamic panel data model (SYS-GMM) between
Country risk
Income-level 2004 and 2017. The results indicate that a reduction in a country’s vulnerability to specific po
litical, economic, and financial risks, contributes to enhanced stability in the banking sector. This
positive effect is particularly pronounced as countries move from low to medium and high-income
levels. Furthermore, the study reveals that a decrease in country risk leads to increased banking
sector stability in both low and high-risk countries, but the effect is more outstanding in low-risk
environments. Moreover, the results highlight the significant influence of banking sector-specific
factors and country-level determinants on stability, however, the magnitude and direction of
these factors’ coefficients depend on the income and risk levels of the countries. The results are
robust and can have important suggestions to policymakers, regulators, and bank executives in
understating and mitigating risk factors to enhance the stability of their banking sectors.
1. Introduction
Banking sector stability has an important role in boosting economic growth and enhancing financial system health in all countries
[1,2]. A stable banking sector is a measure of an economy’s ability to withstand shocks from both the internal and external envi
ronments. Furthermore, the stability of the banking sector indicates the safety and security of the financial system, and it helps to avoid
and alleviate banking crises and their negative economic implications. The historical evidence indicates that it has a substantial impact
on economic growth. On the one hand, the banking sector is one of the most important foundations of a country’s financial system, and
enhancing banking sector stability could aid in the efficient distribution of funds across economies and boost economic growth [3,4].
* Corresponding author.
E-mail addresses: ali_athari@yahoo.com, sathari@ciu.edu.tr (S.A. Athari), faarid.irani@gmail.com, farid.irani@final.edu.tr (F. Irani), Abob_
aker2010@yahoo.com (A. AlAl Hadood).
https://doi.org/10.1016/j.heliyon.2023.e20398
Received 7 March 2023; Received in revised form 19 September 2023; Accepted 22 September 2023
Available online 22 September 2023
2405-8440/© 2023 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
S.A. Athari et al. Heliyon 9 (2023) e20398
According to Ref. [1], banking system stability is defined as a “steady state in which the banking sector efficiently performs its key economic
functions, such as allocating resources, spreading risk, and settling payments.” Stewart et al. (2020) also demonstrated the critical sig
nificance of banking sector stability, discovering that a 1% increase in bank stability leads to a 3.895% rise in economic growth.
Furthermore, increased banking sector stability allows major producers in the economy to better assess risks, resulting in more efficient
resource usage and lower economic volatility [5,6].
Nevertheless, the banking sector due to its unique characteristics (e.g., opaqueness) and role as an intermediary, can be more
vulnerable to moral hazard and adverse selection problems, particularly during periods of uncertainty [7,8]. The previous works [e.g.,
[9,10]] argued that banking sectors are more probable to involve in taking excessive risk activities during a rising country’s vul
nerabilities, which eventually leads to rising financial market instability and also declining countries’ economic activities. According
to the study by Ref. [11] disruption of the banking system reduces banks’ ability to efficiently assess firms’ creditworthiness, which
may increase the cost of lending, resulting in lower firm profitability and, as a result, stock market volatility.
Since the banking sector is a significant driver for promoting economic activities, the interest of many scholars has considerably
triggered to investigate the factors which impact banking sector stability. Notably, the results show that the factors such as capital
regulation, income diversification, market power, and financial inclusion positively impact stability [e.g., [12,13]] while deposit
insurance, bank risks (e.g., credit risk, operational risk), and systemic risk (e.g., market risk) have a negative effect on stability [14,15].
Remarkably, the findings of several studies underscored that systemic risk has a more pronounced negative impact on stability [16,17]
As known, country risk is a form of systemic risk that hits all financial system institutions and cannot be avoidable. According to
Ref. [18] country risk pertains to the level of uncertainty arising from economic, financial, and political factors that can impede a
country’s ability to meet its financial obligations and achieve its goals. Specifically, country risk affects the banking sector by creating
uncertainty that hinders its ability to accurately assess investment opportunities and borrowers’ creditworthiness. Consequently,
country risk directly impacts the functioning and performance of the banking sector. By rising country risks, the uncertainty about
future economic conditions would increase which may adversely affect market participant decisions, the banking sector’s financial
soundness, firms’ investment growth opportunities, and competitiveness [e.g., [19,20]] Especially, it often increases a bank’s insol
vency if no appropriate risk management strategies are taking place to mitigate such risk effects [21]. [16] highlighted that risk-taking
in the banking sector is expected to increase excessively by increasing the systematic risk to compensate for unexpected losses and
reduce the volatility of earnings.
Especially, among country-specific risks, political risk is a form of systematic risk that adversely impacts banking sector perfor
mance [2,22], Studies pointed out that political risk is one of the most dangerous risks faced by banks, and it adversely impacts the
banking sector’s financial soundness by decreasing profitability and increasing credit risk and assets volatility [23,24]. Prior studies
showed that the likelihood of banks’ fragility and earnings fluctuation is higher when the political risk rises. This fluctuation may be
attributed to the uncertainty related to political risk that makes banks’ decision-makers unable to correctly assess the best investment
opportunities and borrowers’ creditworthiness, leading to banks being financially unstable. The study by Ref. [16] stated that banks
have a greater incentive to take on more risk when political instability grows due to increased corruption and government ineffec
tiveness. In the sense that increased corruption and government ineffectiveness would diminish the government’s ability to accomplish
its economic and social tasks, potentially raising the possibility of a government collapse. As a result of the increased uncertainty
caused by corruption and government ineffectiveness, banking sector risk-taking behavior increases dramatically.
Furthermore, economic and financial risks are considered other forms of systematic risk that could trigger risk-taking behavior in
the banking sector. As prior considerations argued [25,26], banks are exposed to adverse selection and moral hazard problems over
times of higher economic risks (e.g., declining economic growth), causing banks to involve in taking excessive risky activities. Also [18,
27], indicated that asymmetry information resulting from higher economic uncertainty hampers banks’ ability to predict better in
vestment opportunities; thus, banks’ asset portfolios are more likely homogeneous, which ultimately influences banks’ expected
returns. Moreover, county financial risk adversely impacts banking sector stability because the shocks originated from an unexpected
devaluation of the domestic currency, and a large deficit of the balance of payments can cause an unpredicted withdrawal of bank
deposits and increase credit risk [e.g., 29]. Besides, a rise in county financial risk caused by government debts leads to an increasing
cost of credit for firms and households, thereby negatively affecting banks’ funds, loan supply, and balance sheets [28,29]. Overall, the
studies suggest that a rising country’s economic and financial risks lead to declining financial soundness and stability in banks.
Most of the researchers [e.g., [16,17,29–34]] discovered that increasing political risk through government intervention and cor
ruption adversely impacts profitability and stability in banking sectors. While numerous studies have been conducted to determine the
impact of political risk, a few studies have been discovered to investigate comprehensively the impact of country-specific risks,
particularly political, economic, and financial risks on banking sectors from a global perspective. Despite the numerous works which
explored the long-term and causal relationship between country risk and the banking sector, this study provides empirical evidence on
the magnitude of the impact of political, economic, and financial risks on banking sector stability. This help to establish a benchmark
for policymakers to prioritize which country risks should be addressed first to minimize their impact on the banking sector. Besides,
there may be less attention made to thoroughly explore the county-specific risks-banking sector stability nexus by considering the
countries’ characteristics such as development and risk level. These considerations are crucial as they might affect the factors at the
banking sector-specific (e.g., capital regulation, credit risk, inefficiency, financial inclusion) and country level (e.g., financial market
development). For instance Ref. [35], by classifying countries based on the economic development level (e.g., emerging, developed)
and [10] by groups based on the geographical classification (e.g., Middle East countries, Sub-Saharan countries, Latin American) tested
this relationship, which they obtained different results.
Therefore, this study seeks to fill the gap and provide some insights into the related literature by deeply investigating whether there
is a linkage between country risk and banking sector stability, particularly by considering political risk, economic risk, and financial
2
risk. Furthermore, we attempt to test the county-specific risks-banking sector nexus by considering countries’ income and risk-level
characteristics. As a result, the current study addresses the subsequent questions.
• How do the country-specific risks especially political, economic, and financial risks impact the stability of banking sectors?
• To what extent might country income and risk-level disparities influence county-specific risks-banking sector stability nexus?
The study contributes to the literature in two distinct ways: First, this study uses novel panel data including International Country
Risk Guide (ICRG) data by PRS Group for measuring the country risk factors. The ICRG country-level composite index scores are
measured by 22 components classifying into the political risk, economic risk, and financial risk indices. Despite prior studies [e.g., 29,
30–33], which used a single variable to account for political, economic, and financial risks, using the ICRG country risk data help
provides an accurate assessment of the effect of country risk on the banking sector stability. Based on the ICRG methodology, financial
risk components are foreign debt (% GDP), foreign debt service, current account, net liquidity in months, and exchange rate stability.
For instance, the foreign debt-to-GDP ratio compares a country’s debt to its economic output, and a higher foreign debt-to-GDP ratio
signifies an increased risk of default, which can lead to financial turmoil both domestically and internationally. Hence, an elevated
debt-to-GDP ratio reflects a significant portion of a country’s financial risks. Likewise, the net liquidity in months which gauges the
country’s ability to finance imports from its reserves and a lower foreign exchange reserves-to-imports ratio indicates a higher like
lihood of debt rescheduling. Therefore, this ratio serves as an indicator of available liquidity to meet import payments and reflects a
segment of a country’s financial risk.
Also, the economic risk components are GDP per head, real GDP growth, annual inflation rate, budget balance, and current account.
The economic risk rating is used to deliver an indicator for assessing a country’s current economic strengths and weaknesses. For
instance, GDP per capita serves as a measure of the income level per person in a country and a higher GDP per capita indicates a
stronger economy, suggesting lower economic risks. In addition, the budget balance (% GDP) measures a government’s ability to meet
its financial obligations and effectively manage public finances, and a positive budget balance signifies a surplus indicating improved
fiscal strength and reduced economic risk and vice versa. As the deficit-to-GDP ratio rises, a country’s strength diminishes, and
economic risks escalate. Moreover, the political risk components are government stability, socioeconomic conditions, internal and
external conflicts, corruption, military in politics, religious tensions, law and order, ethnic tensions, democratic accountability, and
bureaucracy quality. These factors are essential for assessing a country’s political stability. For instance, government stability refers to
the government’s ability to implement its declared policies and maintain its position in office. When a government has strong
legislation, public support, and unity, it can effectively carry out its programs, contributing to political stability and reducing political
risk. As government stability improves, the level of political risk in the country decreases. Internal and external conflicts are also
important indicators of political risk. Internal conflicts reflect political violence within the country and its potential impact on the
ruling authority. If a country experiences civil war, threats of overthrow, terrorism, or political violence, it indicates a higher level of
internal conflict and increases political risk. In a similar vein, external conflicts disrupt government operations, leading to chaos and
heightened political risk. When a country faces intense external pressures such as diplomatic tensions, aid withholding, trade re
strictions, or cross-border conflicts, its political instability and associated political risk increase, impacting the country socially and
economically. Second, the present study makes another contribution by answering how banking sector stability is impacted by the
country risk factors by classifying countries based on the World Banks into the low-medium-high income and PRS Group into the low
and high-risk levels, respectively. To the best of our knowledge, this might be the first comprehensive study that explores this rela
tionship and the results open a new debate in the banking literature.
The findings of this study have valuable implications. First, it implies that banking sector stability is sensitive to the changes in
country risk factors, and policymakers, especially in middle and high-income and low-risk countries, should provide a more stable
political, economic, and financial environment to boost financial stability and also reduce banks’ excessive risk-taking activities. In
other words, the results suggest that policymakers to rise financial stability and enhance economic output should be provided more
politically, economically, and financially stable environments by reducing internal and external conflicts, corruption, religious and
ethnic tensions, inflation, and exchange rate volatility and also rising government stability, democratic accountability, bureaucracy
quality, and GDP growth. In addition, banks’ managers should be considered country risks in pricing loans and other banking products
to avoid any potential risk and maintain banks’ financial stability. Second, the findings suggest that bank managers for maintaining
financial stability should be focused on reducing credit risk and inefficiency and also increasing financial inclusion, particularly in low
and middle-income countries.
The rest of the paper is as follows. Section 2 explains the literature review. Section 3 shows the data and methodology. Sections 4
and 5 present the results and robustness tests. Section 6 presents the conclusion.
2. Literature review
Since the banking sector has a significant effect on boosting economic growth, it is essential to determine the crucial factors which
can influence bank stability. Over the last three decades, the interest of many scholars has considerably triggered to study significant
factors leading to impact bank stability or risk-taking. In the current literature, studies suggested that the significant factors of bank
stability are grouped into bank-specific and country-level. The majority of studies have considered capital regulation, credit risk,
market share, market power, income divarication, financial inclusion, and bank inefficiency for the bank-specific factors. For instance
Ref. [36], pointed out that well-capitalized banks have a more financially stable situation and have less incentive to risk. [37], found
that neither contemporaneous nor lagged credit risk significantly affects banks’ stability. However, the interaction of credit risk with
3
liquidity risk adversely influences banks’ stability. This finding indicates that if banks have higher liquidity levels, their financial
stability would not be affected by credit risks. Nevertheless [38], found that credit risk negatively impacts banks’ financial stability.
[39], showed that credit risk has a positive (negative) effect on banks’ financial stability if credit risk is lower (greater) than the optimal
threshold.
Besides, the findings of some studies provided mixed results for the effect of market share on banks’ financial stability. For instance
Ref. [40], found that the market share positively affects banks’ financial stability, implying that a larger market share enhances banks’
financial stability. Increasing market share leads banks to utilize their market power in pricing services and products provided by them,
resulting in more profits and financial stability. However [12], found that the market share does not influence banks’ financial sta
bility. On the other hand [41], found that the market share negatively affects banks’ financial stability. Also, the findings revealed that
bank size negatively impacts banks’ stability, suggesting that smaller banks are financially more stable relative to bigger banks.
Likewise, numerous studies found that market power positively impacts bank stability. For instance Ref. [42], concluded that
monopolistic competition existed in all of the emerging countries analyzed and the competition in these banking industries has
diminished dramatically since the global financial crisis [43]. examined the relationship between competition, concentration, and
financial stability in the Turkish banking sector, and they found that increased bank pricing power improves stability, while higher
concentration increases risk. More competition and lower concentration enhance bank stability, supporting the competition-fragility
view in the Turkish banking industry [44]. uncovered that less bank competition reduces the impact of monetary policy on bank
lending. Banks that are well-capitalized, liquid, and large exhibit a more pronounced effect.
Furthermore [45], found that the deposit market’s lower competition contributes to higher profitability for Chinese commercial
banks [46]. also studied the competitive behavior of different Brazilian banks to discover how market power influences bank
risk-taking. The authors uncovered that, regardless of capital levels, the market dominance of Brazilian banks has a detrimental impact
on their risk-taking behavior. Also, they showed that the state-owned banks took greater risks to acquire market share after the
financial crisis (2008–09). Besides [47], explored the impact of bank regulation on the connection between competition and financial
stability. The authors found that competition promotes stability and reduces credit risk. They also showed that activity restrictions are
influential in highly competitive environments, while deposit insurance is important in less competitive settings. Additionally [48],
revealed that increased competition in the banking sector improves bank stability. It reduces the likelihood of bank failure, lowers
non-performing loans, and increases profitability. This suggests that competition plays a crucial role in enhancing stability by
improving bank performance and asset quality. Moreover [6], highlighted that the banks operating in low competitive environments
have higher market power and can maintain higher financial stability by achieving supernormal profits through pricing provided
products and services. In contrast, banks are more likely to take risks in a highly competitive market where banks have lower market
power and cannot make supernormal profits [49]. [2] also revealed that market power positively impacts banking sector stability in
various geographical regions.
Furthermore, some studies showed that income diversification significantly impacts banks’ risk-taking behavior. Banks seek to
diversify their income-generated activities by not relying on traditional sources of generating profits such as loans; instead, they are
pursuing to increase non-interest income activities [50]. [41] highlighted that the rise in non-interest income sources tends to increase
the level of banks’ financial stability. However [51,52], found a negative association between income diversification and banks’
financial stability. This is while the study by Ref. [53] showed that income diversification does not affect banks’ financial stability.
Besides, the findings of the majority of studies highlighted that a higher degree of financial inclusion could improve banks’ financial
stability [54]. showed that financial inclusion positively impacts banks’ financial stability in Arab countries [13]. provided interna
tional empirical evidence on the nexus between financial inclusion and bank stability, indicating that a higher level of financial in
clusion positively impacts banks’ financial stability. More recently [55], revealed that the growing level of financial inclusion
positively influences the banking sector’s financial stability in the Asian region [2]. also found that financial inclusion positively
impacts banking sector stability globally. Another stream of literature has also focused on the link between bank risk-taking and bank
efficiency. In this regard [56], showed that risk-taking is positively associated with banks’ inefficiency [57]. found that the bank
efficiency-credit risk nexus is only statistically significant for conventional banks, and there is a negative causal bidirectional nexus
between credit risk and efficiency. Consequently [58], documented that banks with lower credit risk and more financial stability are
more profit efficient.
While the findings of prior studies discussed the importance of bank-specific factors in explaining bank stability (risk-taking), some
studies provided evidence for the significant effect of country-specific factors. [59], revealed that banking sector development leads to
a rise in the bank’s capitalization ratio and decreases banks’ exposure to non-traditional bank activities. Besides [60], suggested that
banking sector development leads to a rise in Islamic and conventional banks’ risk-taking. Likewise, several studies found that deposit
insurance adversely influences banking system stability [e.g., [61]]. This can be explained due to create moral hazard problems by
insuring deposits, causing the insured depositors to have less incentive to curb banks from taking more risks [14]. Especially [62],
documented that deposit insurance leads to increasing banks’ risk-taking behavior after the 2007–2009 global sub-prime financial
crisis.
Remarkably, the findings of some studies underscored that country risk factors, namely political, economic, and financial risks,
could adversely impact bank stability. In the literature, various studies have tested the effect of political risk through different channels
by considering political and government intervention [30,31], corruption [63,64], political transition [33], institutional quality [34],
and political instability [17]. For instance Ref. [30], found that political intervention increases banks’ financial market risk [31].
indicated that government intervention by rising moral hazard negatively drives bank stability [65]. found that corruption negatively
impacts banks’ stability due to the increasing cost of external financing and the probability of borrowers’ default [16,63]. showed that
political instability significantly decreases banking sector profitability and increases risk-taking behavior. The work by Ref. [2]
4
highlighted that political stability is positively associated with banking sector stability. Similarly [17], provided evidence that high
corruption and lack of legislation and order in a country enable banks to participate in highly aggressive loan disbursing activities.
Having low institutional quality creates adverse selection difficulties and causes financial sector moral risks [34]. showed that better
political institutions lead to increasing competition in the bank credit market, reducing the interest rates on loans, and extending loan
maturity, which eventually increases bank risk-taking behavior.
Furthermore, the study by Ref. [32] pointed out that the sovereign government risk increases the cost of external debt financing (e.
g., credit) and reduces banks’ credit supply, leading to an impact on banks’ financial stability [29]. showed that the bank default risk is
positively linked with the growing government sovereign risk level, especially during the European debt crisis period. Moreover [8],
noted that banks’ financial stability is negatively linked to economic risk and banks are less financially stable in environments with
high economic uncertainty levels [64]. found a positive nexus between economic policy uncertainties and non-performing loan rates
and showed that a rise in economic policy uncertainty reduces bank stability. The work by Ref. [26] uncovered that economic stability
is positively linked with banking sector stability [10]. investigated the relationship between domestic political and economic risks and
risk-taking in the banking sector across 105 countries. Their findings indicated that increased risks on a global scale, particularly in the
OECD High-income region, stimulate risk-taking behavior. Nevertheless [16], showed that the country-economic risk (e.g., volatility of
real GDP growth) insignificantly impacts banks’ financial stability. Recently [66], found that an increasing country’s political, eco
nomic, and financial instabilities are strongly linked with rising non-performing loans in the BRICS countries, which ultimately reduce
the banking sector’s stability.
As seen, the majority of studies revealed that the traditional factors in the banking sector and country-level impact bank stability.
Besides, the prior studies stressed that country risk factors significantly influence bank stability. In the related literature, despite some
studies examining the nexus between country risk (e.g., political) and bank stability, a few studies have been found to investigate
deeply the effect of country risk factors especially the political, economic, and financial risks on the banking sector stability (or risk-
taking). More specifically, few studies found to probe this nexus considering the countries’ income and risk level characteristics.
Therefore, this study specifies an empirical framework to examine this nexus by classifying countries based on the low-middle-high
income and low and high-risk levels, correspondingly.
3. Data and methodology
3.1. Data description
The study provides an empirical model by investigating the effect of banking sector-specific and country-level variables on the
banking sector stability globally. Our findings could provide a comprehensive understanding of the factors that contribute to or detract
from banking stability, which can inform policy decisions and risk management strategies in the banking industry. To do so, the sample
size of the present study contains the banking sectors operating in 107 economies between 2004 and 2017 period. The number of
countries and period of the present study is selected based on data availability after matching from different sources and preventing
omitted observations. Table 1 presents the variables’ descriptions and the source of the data collected. The present study collected the
annual data for the banking sector-specific factors from the World Bank.
Besides, this study constructed the financial inclusion index based on the studies by Refs. [2,13], and the annual data is collected
from International Monetary Fund (IMF). For the country-level factors, this study collected the annual data on the financial market
development and institutional quality from the World Bank. Also, the annual data of the deposit insurance is gathered from the IMF.
Moreover, this study gathered the annual data of the domestic risk index1 and its sub-indices, including the political, economic, and
financial risks from the PRS2 Group. Notably, this study classifies countries into low-middle-high income and low and high-risk levels
based on the World Bank and PRS Group definitions, respectively. We selected the variables based on the findings of the majority of
studies in the literature and expect different signs for them. For instance, the capital regulation (RQ/RA), which enforces higher capital
requirements for banks is expected to enhance banking sector stability by providing adequate buffers against losses and maintaining
solvency [36,37]. Also, we expect that higher levels of credit risk (NPL/GL) are likely to have a negative impact on banking sector
stability, as they expose banks to potential losses and erode their financial strength [19,39]. Likewise, we expect that inefficient
banking practices (C/I) including inadequate risk management and resource allocation can undermine stability by hampering a bank’s
financial performance [56]. Furthermore, we expect that the concentration of market share (DA/GDP) and excessive market power (LI)
in the banking industry can also affect stability, as high market concentration may reduce competition and lead to inefficiencies and
increased risk-taking behavior [12,41]. Additionally, we expect that banks with diversified income (NI/TI) sources are likely to have
greater stability, as income diversification mitigates risks associated with reliance on a single revenue stream [41,50]. Besides, we
expect that the occurrence of banking and financial crises (BC) adversely impacts banking sector stability, with rising bank failures,
liquidity shortages, and systemic risks. Moreover, we expect that the financial market development (DC), deposit insurance (DI),
political risk, financial risk, and economic risk can all influence banking sector stability through rising factors such as adverse selection
and moral hazard, corruption, foreign debt levels, inflation rates, budget imbalances, and asset deterioration [10,22,63].
1
https://www.prsgroup.com/wp-content/uploads/2012/11/icrgmethodology.pdf.
2
www.prsgroup.com.
5
Table 1
Variables’ description.
Variables Definitions Signs Sources
(Z)
Dependent variable
Banking stability (Z- The natural logarithm of (ROA + CAR)/σ(ROA) ratio (Ln (Z); where ROA is the return on World Bank
score) assets, CAR is equity to total asset ratio, and σ(ROA) is the standard deviation of ROA. The
higher Z-score value shows the lower probability of the bank’s default.
Earnings volatility The standard deviation of the commercial banks’ pre-tax income to yearly averaged total Author’s calculation based on
(Risk-taking) assets, calculated over 3-year overlapping periods (σ(ROA)). The higher value shows the The
high risk-taking in the banking sector. World Bank
Explanatory variable
Banking-sector specific variables
Capital regulation Bank regulatory capital to risk-weighted assets (%) (RQ/RA); bank capital to total assets + World Bank
(%) (C/TA).
Credit risk Bank non-performing loans to gross loans (%) (NPL/GL). –
Inefficiency Bank cost to income ratio (%) (C/I); bank overhead costs to total assets (%) (OC/TA). – World Bank
Market share Deposit money banks’ assets to GDP ratio (%) (DA/GDP). – World Bank
Market power Lerner index (LI); assets of five largest banks as a share of total commercial banking assets +/− World Bank
(%) (BAC).
Income divarication Bank non-interest income to total income (%) (NI/TI).
Banking crisis The dummy variable equals 1 for the banking crisis period in a country and 0 otherwise – World Bank
(BC).
Financial inclusion The financial inclusion index (FI) is constructed based on financial outreach and usage + IMF
dimensions. The financial outreach dimension is based on geographic and demographic
branch (ATM) penetration: the number of branches per 1000 km2 and the number of ATMs
per 1000 km2; the number of branches per 100,000 adults; and the number of ATMs per
100,000 adults. The usage dimension refers to the number of deposit and loan accounts per
1000 adults.
Country-level variables
Financial market Domestic credit provided by the banking sector to GDP (%) (DC). – World Bank
development
Deposit insurance The dummy variable equals 1 if a country has implemented explicit deposit insurance and – IMF
0 otherwise (DI).
Domestic risk index Domestic risk (DRI) is the composite index score of the International Country Risk Guide + www.prsgroup.com
based on 22 components in three subcategories of political, financial, and economic risk.
The score range is from 0 to 100, and a higher score indicates more stability.
Political risk index Political risk (PRI) is an index containing the government stability, socio-economic + www.prsgroup.com
conditions, investment profile, internal conflict, external conflict, corruption, military in
politics, religious tensions, law and order, ethnic tensions, democratic accountability, and
bureaucracy quality. A political risk score is from 0 to 100, of which 0 indicates the highest
risk and 100 is the lowest risk.
Economic risk index Economic risk (ERI) is an index containing the GDP per head, real GDP growth, annual + www.prsgroup.com
inflation rate, budget balance (Percent of GDP), and current Account (percent of GDP). An
economic risk score is between 0 and 50, of which 0 indicates the highest risk and 50 is the
lowest risk.
Financial risk index Financial risk (FRI) is an index containing the foreign debt (Percent of GDP), foreign debt + www.prsgroup.com
service (percentage of exports of goods and services), current account (percentage of
exports of goods and services), net international liquidity in months, and exchange rate
stability. A financial risk score is between 0 and 50, with 0 indicating the highest risk and
50 as the lowest risk.
Institutional quality Worldwide Governance Indicators (WGI) measure a country’s governance score by using + World Bank’s Worldwide
six dimensions voice and accountability, political stability and absence of violence/ Governance Indicators
terrorism, government effectiveness, regulatory quality, the rule of law, and control of
corruption. This index ranges from − 2.5 to 2.5, where higher values represent higher
regulatory quality and vice versa.
Note: Table 1 describes variables.
3.2. Descriptive statistics
Table 2 presents the descriptive summary of variables between 2004 and 2017. As presented, it reveals that the median value of
banking sector stability (Z-score) increases as we move from the low to high-income countries from 2.26 to 2.65, respectively. In
contrast, the median value of banking sector risk-taking (σ(ROA)) is highest in low-income countries at 0.68, while it is lowest in high-
income countries with a median value of 0.27. Focusing on the banking sector-specific variables, Table 2 reveals that the median values
of RQ/RA, NPL/GL, and C/I decrease as they move from low to high-income countries while the median values of DA/GDP and FI
increase. Besides, Table 2 reveals that the high-income countries have the highest level of DC with a median value of 87.79 and also
have the least vulnerable environments with a median value of 78.22 for the DRI, 78.75 for the PRI, and 39.08 for the ERI. These
countries also have the highest level of institutional quality (WGI), with a median value of 1.10. Moreover, Table 2 shows that the
banking sector stability (risk-taking) in the low-income countries with a median value of 2.26 (0.68) is relatively lower (higher) than
6
S.A. Athari et al.
Table 2
Descriptive statistics (2004–2017).
Variables Low-income countries (N = 16) Middle-income countries (N = 44) High-income countries (N = 47) Global countries (N = 107)
Median St.Dev Min Max Median St.Dev Min Max Median St.Dev Min Max Median St.Dev Min Max
Ln (Z) 2.26 0.47 0.79 3.21 2.55 0.62 0.83 4.11 2.65 0.79 − 4.09 3.88 2.52 0.69 − 4.09 4.11
σ(ROA) 0.68 0.79 0.04 4.60 0.33 1.86 0.00 20.59 0.27 2.92 0.01 37.06 0.33 2.29 0.00 37.06
RQ/RA 18.32 6.86 12.50 43.40 16.20 3.74 1.75 34.90 14.82 4.36 0.73 35.65 15.71 4.50 0.73 43.40
C/TA 10.98 2.87 6.30 18.80 10.10 3.15 1.49 23.00 7.45 6.62 3.00 57.28 9.10 5.27 1.49 57.28
NPL/GL 7.84 7.97 1.80 33.44 4.18 6.07 0.95 54.54 2.63 6.40 0.10 48.68 3.50 6.54 0.10 54.54
C/I 60.43 13.52 24.82 90.78 54.70 11.70 21.03 98.79 54.97 15.23 19.90 218.09 55.72 13.70 19.90 218.09
OC/TA 5.83 2.94 0.17 29.23 3.84 4.30 0.81 81.90 1.65 1.61 0.06 28.01 2.70 3.51 0.06 81.90
DA/GDP 15.69 9.17 4.54 53.94 38.65 33.62 2.02 174.54 93.66 46.23 18.01 261.42 51.48 49.08 2.02 261.42
7
LI 0.29 0.11 0.01 0.60 0.28 0.16 − 0.08 1.53 0.27 0.16 − 0.07 1.00 0.28 0.16 − 0.08 1.53
BAC 93.56 11.56 55.00 100.00 74.89 15.75 28.97 100.00 86.20 14.51 36.78 100.00 81.27 15.77 28.97 100.00
NI/TI 43.90 13.77 9.12 87.75 33.71 13.54 0.40 95.26 37.83 14.02 10.54 96.17 36.94 14.18 0.40 96.17
BC 0.00 0.00 0.00 0.00 0.00 0.15 0.00 1.00 0.00 0.328 0.00 1.00 0.00 0.25 0.00 1.00
FI 0.00 0.97 − 2.18 2.17 0.08 1.05 − 2.97 5.06 0.17 1.08 − 3.15 2.98 0.09 1.05 − 3.15 5.06
DC 12.82 7.58 2.66 41.80 32.23 29.08 1.27 157.57 87.79 50.27 0.19 308.98 45.24 50.42 0.19 308.98
DI 0.00 0.43 0.00 1.00 1.00 0.43 0.00 1.00 1.00 0.33 0.00 1.00 1.00 0.44 0.00 1.00
DRI 60.00 5.04 43.79 70.85 67.74 5.80 36.39 84.48 78.22 5.98 61.62 92.37 70.98 8.96 36.39 92.37
PRI 53.92 7.64 35.00 70.21 61.06 8.01 33.21 78.50 78.75 6.97 61.04 93.67 67.54 12.59 33.21 93.67
ERI 31.21 3.33 20.29 37.00 35.08 4.22 18.25 46.25 39.08 4.54 19.88 50.00 36.25 5.21 18.25 50.00
FRI 34.75 4.81 18.21 43.17 39.31 4.40 17.21 49.00 38.04 4.86 20.42 48.46 38.29 4.97 17.21 49.00
WGI − 0.70 0.39 − 1.89 − 0.18 − 0.52 0.46 − 1.90 0.80 1.10 0.57 − 0.48 1.96 − 0.06 0.94 − 1.90 1.96
Note: Table 2 shows the descriptive summary of the variables.
Heliyon 9 (2023) e20398

global countries with a median value of 2.52 (0.33), respectively. Appendix A1 shows the mean value of some variables for the
investigated countries.
Fig. 1 demonstrates the time series plot of banking sector stability in low, medium, and high-income (Panel (A)) and low and high-
risk countries (Panel (B)). As shown, the subprime financial crisis in 2008 has the most negative effect on the banking sector stability in
high-income countries. However, the banking sector stability in high-income countries soars to the highest level relative to the low-
and middle-income countries, particularly after 2014. Besides, Fig. 1 explains that the global financial crisis has the most significant
unfavorable impact on the banking sector stability in low-risk and high institutional quality levels countries. However, the recovery in
the banking sector took place at a faster rate in these countries relative to their counterparts, especially after 2010. Fig. 2 (Panel (A),
(B), (C), (D)) also presents the time series plot of country risk factors. Fig. 2 shows that the global financial crisis in 2008 has the most
adverse impact on economic risk in high and medium-income countries.
Table 3 shows the Pearson correlation matrix and variance inflation factors (VIF) for the variables. As shown, there is a low
correlation between the explanatory variables, suggesting no severe problems with multicollinearity in the estimation models.
3.3. Models and methodology
Before doing the analysis, we winsorized entire variables at the top and bottom 1% for each year to avoid outlier problems. Besides,
as the data are at the country level, the cross-sectional dependence post-estimation test [67] is performed. Remarkably, the results
(− 0.822, Pr = 0.653) provide evidence that the estimation model does not suffer from cross-section dependency (H0: cross-section
independence). Following the study by Ref. [37], this study comprises the lagged dependent variable in the above equations. For
Fig. 1. Time series plot of banking sector stability in countries with different income, risk, and institutional quality levels.
8
Fig. 2. Time series plot of country risk and its sub-indices in countries with different income and risk levels (2004–2017).
estimating the model, this study uses the dynamic panel data approach (System-GMM) to control the endogeneity and unobserved
country fixed effects problems [68–70]. As [10] argued, applying the System-GMM is more appropriate because the System-GMM
estimator included both the levels and the first difference equations and outperforms the Difference-GMM methodology. Remarkably,
serial correlation (AR (2)) and overidentification diagnostic tests are used to examine the validity of the estimated models. The specific
following practical form is employed to probe the determinants of banking sector stability.
Banking sector stability = f (Banking sector-specific, country level)
Eqs. (1) and (2) expanded the aforementioned practical form and performs to investigate specifically the effects of the domestic risk
index and its sub-indices, namely the political, economic, and financial risks on banking sector stability.
Ln(Z)it = α0 + α1 Ln(Z)it− 1 + α2 + α3 NPL/GLit + α4 C/Iit + α5 DA/GDPit + α6 LIit

RQ/RAit
+ α7 NI/TIit + α8 BCit + α9 FIit + α10 DCit + α11 DIit + α12 DRIit + εit (1)
Ln(Z)it = α0 + α1 Ln(Z)it− 1 + α2 + α3 NPL/GLit + α4 C/Iit + α5 DA/GDPit + α6 LIit

RQ/RAit
+ α7 NI/TIit + α8 BCit + α9 FIit + α10 DCit + α11 DIit + α12 Domestic risk sub − indexit + εit (2)
where it represents the country and time, respectively, εit is an independent error term. Ln (Z) is measured banking sector stability. The
specific-banking sector and country-level factors include capital regulation (RQ/RA); credit risk (NPL/GL); inefficiency (C/I); market
share (DA/GDP); market power (LI); income diversification (NI/TI); banking crisis (BC); financial inclusion (FI); financial market
development (DC); deposit insurance (DI); domestic risk index (DRI); and domestic risk sub-index contains financial risk index (FRI),
economic risk index (ERI), and political risk index (PRI).
9
S.A. Athari et al.
Table 3
Pearson correlation matrix.
RQ/RA NPL/GL C/I DA/GDP LI NI/TI BC FI DC DI DRI VIF
RQ/RA 1.000 1.12

NPL/GL 0.235* 1.000 1.14
C/I 0.003 0.078* 1.000 1.06
DA/GDP 0.086* 0.108* − 0.041 1.000 1.15
10
LI − 0.014 0.031 − 0.241* 0.040 1.000 1.10

NI/TI − 0.068* − 0.174* 0.321* − 0.094* − 0.139* 1.000 1.05
BC 0.081* 0.181* − 0.017 − 0.088* − 0.102* − 0.014 1.000 1.18
FI 0.045** 0.010 − 0.069* 0.014 − 0.228* − 0.077* 0.062** 1.000 1.11
DC 0.112* 0.155* − 0.117 0.252* − 0.108* − 0.021 − 0.023 − 0.121* 1.000 1.03
DI 0.214* 0.251* 0.246 0.106* 0.0251 − 0.123* 0.061** 0.010 0.075* 1.000 1.14
DRI 0.116* − 0.086** − 0.131* 0.025 0.134* 0.132* 0.018 0.161* 0.041 0.332* 1.000 1.16
Note: The symbols * and ** indicate statistical significance at the 1% and 5% levels, respectively.
Heliyon 9 (2023) e20398

4. Empirical results
4.1. Pre-estimation tests
This work performs several pre-estimation tests. First, the stationarity of the variables is tested by performing the panel unit root
methods proposed by Refs. [71,72,67]. As presented in Table A2, the panel unit root results show that the examined factors are
stationary, by rejecting the null hypothesis which panels contain unit roots, after taking the first difference.
Second, the direction of nexus among the factors is probed by conducting the Granger causality test to control endogeneity
problems. As presented in Table A3, Granger causality is from the set of independent variables (NPL/GL, NPL/GL, C/I, DA/GDP, LI, NI/
TI, FI, DC, DRI, PRI, ERI, and FRI) to banking sector stability (Ln (Z)) for the statistically significant panel of countries. This implies that
the historical information on detecting explanatory variables can recommend future information about banking sector stability for
global countries.
4.2. Multivariate results
Table 4 presents the estimation results of Eq. (1) using the System-GMM methodology after classifying countries based on the World
Bank definition into the income level. Focusing on the banking sector factors, the estimation results indicate that capital regulation
(RQ/RA) positively impacts banking sector stability in low-medium-high-income countries. In line with prior studies [e.g., 74, 75]. Our
finding implies that banks by increasing capital regulation could better withstand unexpected losses and are more able to maintain
financial stability. Besides, the estimation results indicate that the credit risk (NPL/GL) adversely impacts banking sector stability, and
the extent of the effect is smaller as they move from low to medium and high-income countries. Credit risk has a substantial impact on
banking sector stability since it increases the chance of loan defaults, which can result in financial losses, potential capital adequacy
concerns, liquidity strain, and systemic hazards. The works by Refs. [19,39] showed that the higher credit risk adversely impacts a
bank’s competitiveness, solvency, profitability, and eventually stability. Notably [37], suggested that liquidity risk impacts bank
stability, especially when the credit risk is high.
Furthermore, the results highlight that the inefficiency (C/I) adversely impacts banking sector stability, supporting the “bad
management” hypothesis. Poor management practices (e.g., inefficient resource allocation) could contribute to operational in
efficiencies that might jeopardize the stability and long-term sustainability of banks. This is in line with prior studies [e.g., 73,74,
Table 4
The effect of the domestic risk index on banking sector stability in different income-level countries.
Independent variables Low-income (N = 16) Middle-income (N = 44) High-income (N = 47) Global (N = 107)
Lag (Ln (Z)) 0.755* 0.843* 0.802* 0.871*

(4.59) (6.68) (4.43) (3.12)
RQ/RA 0.066** 0.025** 0.047* 0.088***
(2.04) (2.13) (3.11) (1.72)
NPL/GL − 0.035* − 0.023** − 0.015* − 0.017*
(− 3.65) (− 2.05) (− 3.10) (− 3.28)
C/I − 0.031* − 0.024** − 0.017* − 0.150*
(− 4.90) (− 2.12) (− 3.54) (− 3.32)
DA/GDP − 0.016 − 0.013 − 0.067* − 0.011**
(− 1.47) (− 0.48) (− 4.17) (− 4.25)
LI 0.018* 0.012** 0.031** 0.034***
(4.23) (2.05) (2.06) (1.76)
NI/TI 0.056** 0.036** 0.019* 0.130*
(2.16) (2.14) (6.91) (3.94)
BC − 0.008 − 0.026 − 0.963* − 0.234
(− 0.16) (− 0.33) (− 4.04) (− 0.21)
FI 0.373 0.052* 0.937* 0.724***
(1.02) (3.92) (3.50) (1.67)
DC − 0.001 − 0.003 − 0.075* − 0.011*
(− 0.33) (− 1.05) (− 3.77) (− 4.21)
DI − 0.033 − 0.043** − 0.248** − 1.406
(− 1.01) (− 2.04) (− 1.89) (− 0.44)
DRI 0.043* 0.052* 0.445* 0.721**
(3.45) (4.14) (3.18) (2.15)
Time dummy YES YES YES YES
Hansen-test (0.425) (0.417) (0.462) (0.458)
Sargan-test (0.318) (0.436) (0.327) (0.379)
M2- test (0.315) (0.366) (0.375) (0.382)
Note: Table 4 explicitly shows the effect of the domestic risk index on banking sector stability between 2004 and 2017 using (SYS-GMM). Standard
errors are asymptotically robust to heteroscedasticity. The t-statistics are reported in parentheses. Ln(Z) is banking stability; RQ/RA is capital
regulation; NPL/GL is credit risk; C/I is inefficiency; DA/GDP is market share; LI is market power; NI/TI is income divarication; BC is banking crisis
dummy; FI is financial inclusion index; DC is domestic credit provided by the banking sector to GDP; DI is deposit insurance dummy; DRI is domestic
risk index. The symbols *, **, and *** indicate statistical significance at the 1%, 5%, and 10% levels, respectively.
11
S.A. Athari et al.
Table 5
The effect of the domestic political, economic, and financial risk indices on banking sector stability in different income-level countries.
PRI ERI FRI PRI ERI FRI PRI ERI FRI PRI ERI FRI
Lag (Ln (Z)) 0.759* 0.764* 0.763* 0.785* 0.885* 0.822* 0.809* 0.805* 0.781* 0.853* 0.898* 0.868*
(3.89) (5.26) (3.86) (3.82) (3.25) (3.27) (3.22) (3.11) (4.45) (4.42) (4.80) (3.38)
RQ/RA 0.043* 0.029 0.041** 0.017 0.023** 0.019** 0.031* 0.032* 0.028* 0.039 0.058* 0.059**
(3.74) (0.62) (2.03) (1.05) (2.12) (2.07) (3.13) (5.32) (3.31) (0.70) (4.15) (2.07)
NPL/GL − 0.032* − 0.016 − 0.033** − 0.016 − 0.021** − 0.019* − 0.011 − 0.012 − 0.015** − 0.051 − 0.055 − 0.098**
(− 4.48) (− 0.35) (− 2.01) (− 0.78) (− 2.02) (− 4.15) (− 0.50) (− 1.15) (− 2.02) (− 0.38) (− 0.12) (− 2.05)
C/I − 0.053** − 0.058* − 0.021 − 0.032 − 0.033** − 0.015 − 0.014* − 0.009 − 0.011*** − 0.154* − 0.127* − 0.168*
(− 2.07) (− 2.41) (− 0.91) (− 0.44) (− 2.14) (− 0.44) (− 3.64) (− 1.09) (− 1.89) (− 3.27) (− 2.86) (− 3.38)
DA/GDP − 0.014 − 0.012 − 0.023 − 0.011 − 0.015 − 0.016* − 0.061* − 0.012 − 0.065* − 0.021* − 0.041 − 0.037
(− 1.44) (− 1.31) (− 0.66) (− 1.11) (− 0.51) (− 2.70) (4.26) (− 1.02) (− 3.77) (− 3.48) (− 0.96) (− 0.75)
LI 0.017** 0.014 0.011 0.011** 0.012** 0.001 0.021*** 0.019 0.028 0.035** 0.035* 0.068**
(2.02) (1.03) (1.01) (2.07) (2.11) (0.31) (1.74) (1.02) (1.42) (2.04) (3.86) (2.15)
12
NI/TI 0.067** 0.073** 0.063 0.031** 0.012 0.037** 0.017* 0.018* 0.096 0.111 0.147* 0.153*
(2.02) (2.07) (1.23) (2.15) (1.09) (2.14) (4.54) (2.91) (1.21) (1.19) (4.68) (3.88)
BC − 0.031 − 0.148 − 0.022 − 0.025 − 0.022 − 0.021** − 0.721 − 0.766* − 0.785** − 0.579 − 0.512 − 0.520
(− 0.17) (− 0.33) (− 0.47) (− 0.89) (− 1.18) (− 2.31) (− 1.02) (− 4.52) (− 2.12) (− 0.29) (− 0.58) (− 0.19)
FI 0.418 0.334 0.202 0.054 0.038** 0.039* 1.001* 0.091** 0.059 0.474** 0.928** 0.361
(0.392) (0.77) (1.03) (0.88) (2.06) (4.32) (4.46) (1.91) (1.12) (1.98) (2.16) (1.60)
DC − 0.002 − 0.001 − 0.002 − 0.001 − 0.002 − 0.001 − 0.089* − 0.075 − 0.091* − 0.034* − 0.021 − 0.031*
(− 1.31) (− 0.97) (− 0.65) (− 0.20) (− 0.94) (− 1.10) (− 3.41) (− 0.68) (− 3.97) (− 5.18) (− 0.40) (− 3.12)
DI − 0.044 − 0.043 − 0.038 − 0.034 − 0.031* − 0.054* − 0.591* − 0.128 − 0.373* − 0.301 − 0.585 − 0.832
(− 1.15) (− 1.34) (− 1.06) (− 0.86) (− 2.84) (− 2.71) (− 3.27) (− 1.01) (− 3.08) (− 0.23) (− 0.58) (− 1.10)
DRI 0.041** 0.031* 0.034** 0.046** 0.035** 0.025** 0.501** 0.441* 0.018** 0.516** 0.295* 0.435**
(2.04) (3.61) (2.03) (2.07) (2.06) (2.04) (2.13) (3.34) (2.09) (2.16) (3.73) (2.11)
Time dummy YES YES YES YES YES YES YES YES YES YES YES YES
Hansen-test (0.443) (0.384) (0.358) (0.397) (0.388) (0.348) (0.443) (0.465) (0.445) (0.573) (0.442) (0.648)
Sargan-test (0.312) (0.425) (0.266) (0.426) (0.237) (0.452) (0.289) (0.354) (0.422) (0.364) (0.557) (0.349)
M2- test (0.328) (0.336) (0.378) (0.496) (0.534) (0.578) (0.366) (0.342) (0.423) (0.334) (0.42) (0.371)
Note: Table 5 shows the effect of domestic risk sub-indices on banking sector stability. The symbols *, **, and *** indicate statistical significance at the 1%, 5%, and 10% levels, respectively.
Heliyon 9 (2023) e20398

which found that as bank capital rises, moral hazard incentives decrease and stronger-capitalized banks have a greater incentive to
boost productivity by lowering costs than smaller-capitalized banks. The results highlight that C/I has a pronounced negative effect on
the banking sector stability in low-income countries. As shown in Table 2, these countries have the highest C/I relative to their
counterparts. Besides, Table 4 shows that market share (DA/GDP) negatively impacts banking sector stability, but the effect is only
significant for higher-income countries. Our findings support the “too big to fail” hypothesis [75], implying that banks with a larger
share of deposits to assets are relatively more exposed to moral hazard risk and also have more incentives to involve in taking excessive
risky investments to increase shareholders’ profits at the expense of depositors. Besides, the results underscore that market power (LI)
positively impacts banking sector stability. Consistent with the Structure-Conduct Performance (SCP) hypothesis, banks with more
market power are inclined to collude and earn monopoly profits [76,77], which resulted in increasing banks’ profitability and financial
stability. Consequently [78], revealed that a bank with a higher degree of market power has a lower risk of insolvency. However [49],
argued that banks with higher market power have lower financial stability since they prefer to charge entrepreneurs with higher loan
rates, which resulted in pursuing creditors involving risky investments after borrowing funds and also increasing credit risk.
The results also show that income divarication (NI/TI) positively influences banking sector stability, and the effect is more
prominent in low-income countries. By diversifying their revenue streams, banks can decrease their exposure to negative shocks in any
one industry or line of business. The bank’s resilience in the face of economic downturns and overall stability can both benefit from this
strategy of diversification. As shown in Table 2, the NI/TI is relatively higher in low-income countries than the middle and high-income
economies. Income diversification has a higher impact on bank stability in lower-income countries due to limited economic oppor
tunities, higher economic and financial risks, market concentration, and limited access to capital markets. Diversifying income sources
allows banks to mitigate sector-specific risks, enhance competitiveness, and generate internal capital, contributing to their stability
and resilience in these contexts. Consistently [79], showed that bank income diversification contributes to greater bank stability.
Likewise, the results show that the banking crisis (BC) impacts banking sector stability negatively though the effect is only significant
for high-income countries. As shown in Fig. 1, the banking sector in high-income countries is relatively more exposed to the negative
effect of the subprime mortgage crisis in 2008 and 2009. This is why the global financial crisis has the least spillover adverse impact on
the stability of the banking sector in low and medium-income economies. The results also show that the impact of financial inclusion
(FI) on bank stability differs depending on income level. While considerable in middle and high-income countries, it may be insig
nificant in low-income countries due to infrastructure, regulatory environment, market maturity, and risk profile concerns. Financial
inclusion activities that are tailored to meet specific contextual issues can have a greater favorable influence on bank stability. As [13]
argued, a financially inclusive financial sector coupled with high institutional quality levels will foster stability as it enables banks to
work efficiently in those settings. This finding is also consistent with the studies by Refs. [80–82] who concluded that a system of
inclusive financial services appears to reinforce bank stability.
Besides, Table 4 shows that the country-level factors significantly impact banking sector stability. The results reveal that financial
development (DC) negatively affects the banking sector stability while the effect is only significant in high-income countries. The
negative and significant effect is based on our expectation as the domestic credit provided by the banking sector is relatively higher in
high-income countries, and a rise in domestic credit negatively impacts banks’ profitability [2]. Besides, these countries have a more
profound financial sector and a lower interest margin relative to the low and middle-income countries [83,84]. The results also
highlight that deposit insurance (DI) negatively impacts banking sector stability, and the effect is significant in medium and
high-income countries. The greater negative impact of DI on banking sector stability in high-income countries can be explained as
these countries have explicit deposit insurance schemes, and depositors appear to bail out at any time when a systemic problem occurs
[34]. [61] stated that DI is an important source of moral risk and could raise the risk of banking crises, particularly where interest rates
are deregulated, and the institutional climate is fragile. Similarly [61,62], argued that explicit DI creates a moral hazard, and banks
with more DI are more likely to operate with less capital and take excessive risky investments at the expense of depositors.
Furthermore, the results underscore that the domestic risk index (DRI) significantly influences banking sector stability however the
extent of the effect is relatively higher in high-income countries. As shown in Table 2, high-income countries have the least vulnerable
environments, whereas low-income countries have the most vulnerable environments. In high-income countries, having stronger
institutions and regulations, higher economic resilience, and more investor confidence drive the banking sector to become relatively
more stable when such countries are less exposed to political, economic, and financial risks. The prior studies [e.g., [2,63]] also
stressed that rising domestic political and economic stabilities could reduce cash flow volatility and improve banks’ profitability.
Moreover, Table 4 reveals that except for BC and DI, the mentioned above factors significantly affect stability in the banking sector
globally.
Table 5 presents the estimation results of Eq. (2) using the System-GMM methodology. As shown in Table 4, the results show that
the banking sector and country-level factors significantly impact stability while the size of the effect varies depending on the income
level of countries. Specifically, Table 5 provides evidence that the political, economic, and financial risks significantly impact banking
sector stability [17]. argued that the banking system would become less stable by rising political instability due to increasing infor
mational asymmetries and adverse selection problems. Besides, the study by Ref. [33] showed that an increase in political instability is
associated with a decline in bank profitability and banks typically perform better in countries having more political stability. Similarly
[63,85], discussed that political risk is a significant factor for bank stability, and increasing political stability and controlling cor
ruption could increase banks’ profitability and stability [66]. showed that rising political instability is strongly associated with
increasing non-performing loans, leading to lower stability in the banking sectors. Rising domestic political risk poses considerable
concerns to banking sector stability, decreases investor confidence, destabilizes the regulatory environment, and weakens governance
and risk management procedures. Remarkably, the results reveal that the effect of political risk is pronounced in the high-income
countries where these environments have relatively the most politically stable environments. The positive effect in high-income
13
countries might be explained due to their interconnection with global markets, dependence on foreign trade and investments, and the
importance of confidence among investors and cross-border capital flows. Consequently, the higher political instability can lead to
decreasing inflows of capital and instead, the countries might be experienced capital flight, leading to a deteriorating banking system.
Furthermore, economic risk exerts its influence on various aspects of bank operations, encompassing asset quality, funding,
liquidity, and profitability. During economic downturns and financial crises, non-performing loans increase, funding becomes more
challenging, and banks face decreasing profitability. Particularly, the effect of economic risk is more pronounced in countries (e.g.,
high-income countries) that are characterized by substantial economic policies, robust governance systems, and competitive envi
ronments [63,64]. [10,62] noted that countries with more economic stability have more banking sector stability [63]. also revealed
that a decline in economic risk (e.g., increasing GDP growth) positively impacts banks’ profitability.
Moreover, the estimation results show that financial risk significantly impacts the stability of the banking system. An increase in
financial risk reduces bank stability, particularly in low and middle-income countries. This impact might be explained through a
variety of channels, including asset valuation, funding issues, systemic risk, and risk management [86,87]. argued that an increase in
financial risk (e.g., exchange rate volatility) is associated with an increase in market uncertainty and bank instability [29,32]. also
discussed that banks’ default risk is associated with sovereign government risk, and banks are less stable when sovereign risk is high
[66]. also revealed that non-performing loans are significantly impacted by rising financial risk. Overall, the results uncovered that
banking sectors must proactively analyze and manage political, economic, and financial risks to maintain stability and withstand
potential unfavorable occurrences. Moreover, Table 5 confirms that the political, economic, and financial risk factors significantly
affect banking sector stability globally.
Table 6 presents the estimation results of Eq. (1) using the System-GMM methodology after classifying countries based on the PRS
Group definition into low and high-risk levels. This work assumes a country is in the low (high) risk level if the country’s risk score
places below (above) the average of the overall score considering all investigated countries. The estimation results highlight that the
mentioned variables in Tables 4 and 5 affect banking sector stability in low and high-risk countries. The findings show that a decrease
in country risk triggers an increase in banking sector stability in both low and high-risk countries; however, banking sector stability in
low-risk environments responds more strongly to changes in country risk. This can be explained as banks operating in low-risk
countries are relatively more able to increase their profitability than their counterparts through providing more financial services
(e.g., higher level of financial inclusion) and supplying credits (e.g., more developed financial markets) when environments are less
vulnerable. On the contrary, to the increasing vulnerability of environments, banks are relatively more exposed to bank-specific risks
Table 6
The effect of the domestic risk index on banking sector stability and risk-taking in different risk-level countries.
Independent variables Panel A: Dependent variable (Ln (Z))
Low domestic risk (N = 53) High domestic risk (N = 54)
Lag (Ln (Z)) 0.844* 0.875*

(4.34) (4.18)
RQ/RA 0.112* 0.316*
(3.80) (3.27)
NPL/GL − 0.027** − 0.109*
(− 2.52) (− 4.33)
C/I − 0.035* − 0.104*
(− 5.12) (− 3.39)
DA/GDP − 0.074* − 0.022***
(− 3.57) (− 1.83)
LI 0.043* 0.040*
(3.59) (4.84)
NI/TI 0.028** 0.033*
(2.04) (4.32)
BC − 0.813* − 0.004
(− 3.11) (− 0.85)
FI 0.309** 0.182*
(2.02) (3.52)
DC − 0.172*** − 0.046
(− 4.44) (− 1.50)
DI − 0.029* − 0.013**
(− 4.28) (− 2.04)
DRI 0.908* 0.411*
(5.80) (3.90)
Time dummy YES YES
Hansen-test (0.452) (0.426)
Sargan-test (0.538) (0.369)
M2- test (0.363) (0.372)
Note: Table 6 shows the effect of the domestic risk index on banking sector stability and risk-taking between 2004 and 2017 in low
and high-domestic-risk countries. Low domestic-risk countries have less vulnerable environments, and high domestic-risk
courtiers have more vulnerable environments. Descriptions of the variables are shown in Table 4. The symbols *, **, and ***
indicate statistical significance at the 1%, 5%, and 10% levels, respectively.
14
such as credit and liquidity risks, causing increased earnings volatility and instability considerably.
5. Robustness checks
The present study performs numerous tests to control the consistency of the results. First, this study re-estimates Eq. (1) by
including the global financial crisis (2008–09) dummy variable, which equals to one in 2008 and 2009 and zeroes otherwise, and also
using the new proxies of the “bank capital to total assets” (C/TA), “bank overhead costs to total assets” (OC/TA), and “assets of five
largest banks as a share of total commercial banking assets” (BAC) for measuring capital regulation, inefficiency, and market power,
respectively. This study also uses “Worldwide Governance Indicators” (WGI) as a proxy for measuring institutional quality.
Remarkably, as shown in Table 3, there is a high correlation between WGI and domestic risk index (DRI) variables so countries with
low and high domestic risks have high and low institutional quality, respectively. Table 7 shows the estimation results and highlights
that a rise in capital regulation, market power, and institutional quality increases banking sector stability while inefficiency reduces
stability.
Second, this study re-estimates Eq. (2) by using a new dependent variable of “risk-taking” (σ(ROA)) as suggested by Ref. [10].
Table 8 shows the results and underscores that the higher capital regulation (RQ/RA) reduces risk-taking though the size of the effect
depends on the income level of the countries. The asymmetric negative effect may be due to the different institutional settings among
countries that affect bank regulations and risk-taking behavior differently. Prior studies [e.g., 89] argued that rising capital re
quirements could decrease banks’ risk-taking and mitigate the moral hazard problem, especially when countries have solid institu
tional settings. Besides, the results are in line with the prior studies [19,39] and indicate that credit risk (NPL/GL) positively impacts
risk-taking. The results also support the studies by Refs. [34,56] showing that inefficiency (C/I) positively affects risk-taking, especially
in low and middle-income countries.
Furthermore, the results highlight that market share (DA/GDP) positively impacts risk-taking; however, the effect is only signif
icant in middle-and high-income countries. Studies by Refs. [16,88] showed that a higher DA/GDP increases the moral hazard risk and
encourages banks to involve in high-risk-taking investments. Likewise, the results confirmed the prior studies [e.g., [46,89]] and reveal
that market power (LI) and income divarication (NI/TI) adversely impact risk-taking in low-medium-high-income countries. Also, the
results highlight that the banking crisis (BC) significantly increases risk-taking in high-income countries. Besides, the results support
prior studies [2,13,90] revealed that financial inclusion (FI) negatively affects risk-taking however the effect is only significant in
middle and high-income countries.
Likewise, Table 8 shows that financial development (DC) positively influences risk-taking though the effect is only significant in
Table 7
Robustness test I.
Variables Low-income (N = 16) Middle-income (N = 44) High-income (N = 47) Global (N = 107)
Lag (Ln (Z)) 0.766* 0.768* 0.858* 0.804* 0.873* 0.878* 0.833* 0.874*
(4.69) (4.39) (4.03) (4.27) (3.48) (3.43) (4.12) (4.38)
C/TA 0.040* 0.038* 0.001*** 0.002 0.003* 0.002*** 0.042** 0.029
(4.10) (3.94) (1.79) (1.21) (2.90) (1.68) (2.05) (0.84)
NPL/GL − 0.032* − 0.014 − 0.021** − 0.019 − 0.009 − 0.013* − 0.013* − 0.012*
(− 3.26) (− 1.17) (− 2.07) (− 1.25) (− 0.78) (− 3.49) (− 3.35) (− 3.26)
OC/TA − 0.008 − 0.005* − 0.003* − 0.012 − 0.001* − 0.012 − 0.317** − 0.154
(− 0.99) (− 4.23) (− 3.25) (− 1.04) (− 2.03) (− 1.03) (− 2.07) (− 0.40)
BA/GDP − 0.022 − 0.010 − 0.011 − 0.012* − 0.051* − 0.044** − 0.011 − 0.015*
(− 0.46) (− 0.34) (− 1.42) (− 3.03) (− 3.53) (− 2.04) (− 1.33) (− 3.80)
BAC 0.001* 0.002 0.002*** 0.001 0.055* 0.061* 0.015** 0.023*
(4.05) (0.65) (1.68) (0.33) (4.23) (3.32) (2.34) (2.96)
NI/TI 0.033*** 0.014 0.011 0.023** 0.013* 0.093 0.061* 0.058*
(1.67) (1.23) (0.95) (2.11) (5.18) (1.38) (3.01) (2.74)
BC − 0.393 − 0.470 − 0.023 − 0.021 − 0.658** − 0.743*** − 0.668** − 0.342*
(− 0.98) (− 1.42) (− 0.29) (− 1.32) (− 2.08) (− 1.71) (− 2.24) (− 2.60)
FI 0.039 0.035 0.038** 0.028 0.404* 0.292 0.942** 0.906**
(1.13) (0.46) (2.04) (0.30) (4.42) (0.60) (2.21) (2.02)
DC − 0.003 − 0.002*** − 0.004* − 0.001 − 0.058* − 0.044* − 0.046** − 0.041
(− 0.62) (− 1.67) (− 3.17) (− 0.79) (− 3.67) (− 3.19) (− 2.06) (− 1.59)
DI − 0.308 − 0.269 − 0.041*** − 0.007 − 0.359* − 0.104 − 0.396 − 0.503***
(− 0.35) (− 1.09) (− 1.76) (− 0.81) (− 3.77) (− 0.46) (− 1.26) (− 1.82)
WGI 0.113** – 0.213** – 0.466* – 0.204** –
(2.15) – (2.04) – (3.48) – (2.10) –
DRI – 0.003*** – 0.032* – 0.455* – 0.436***
– (1.67) – (3.22) – (4.62) – (1.82)
Time & FC dummies YES YES YES YES YES YES YES YES
Hansen-test (0.418) (0.425) (0.349) (0.334) (0.573) (0.476) (0.436) (0.442)
Sargan-test (0.539) (0.359) (0.258) (0.552) (0.482) (0.581) (0.327) (0.358)
M2- test (0.327) (0.354) (0.415) (0.567) (0.331) (0.436) (0.352) (0.336)
Note: C/TA is capital regulation; OC/TA is inefficiency; BAC is market power, and WGI is the institutional quality index. Time & FC dummies include
both time and global financial crisis (2008–09).
15
S.A. Athari et al.
Table 8
Robustness test II.
PRI ERI FRI PRI ERI FRI PRI ERI FRI PRI ERI FRI
Lag (σ(ROA)) 0.709* 0.773* 0.720** 0.745* 0.793* 0.739** 0.871* 0.842** 0.738* 0.854* 0.844* 0.852*
(4.52) (3.93) (2.03) (3.35) (3.10) (2.07) (4.73) (2.09) (4.47) (4.36) (4.61) (4.21)
RQ/RA − 0.022** − 0.021* − 0.004 − 0.011** − 0.011 − 0.012** − 0.015* − 0.002 − 0.001 − 0.002* − 0.001 − 0.003*
(− 2.04) (− 3.52) (− 1.42) (− 2.02) (− 1.10) (− 2.11) (− 2.88) (− 1.46) (− 1.07) (− 3.95) (− 1.61) (− 4.33)
NPL/GL 0.005** 0.002 0.004** 0.003* 0.001 0.002 0.004 0.001* 0.002* 0.003* 0.002* 0.002
(2.05) (0.12) (2.11) (4.09) (1.02) (1.32) (0.87) (3.49) (3.82) (4.16) (5.07) (1.24)
C/I 0.026 0.047* 0.042* 0.012 0.023** 0.003 0.003* 0.004 0.005* 0.001 0.003* 0.003*
(0.84) (2.62) (3.81) (1.04) (2.18) (0.90) (3.42) (1.46) (3.84) (0.68) (3.57) (4.99)
DA/GDP 0.003 0.001 0.002 0.003* 0.004* 0.005* 0.011 0.013* 0.014 0.002 0.001*** 0.001**
(1.52) (0.46) (0.39) (5.43) (6.16) (3.45) (0.67) (3.75) (1.59) (1.38) (1.92) (2.19)
LI − 0.003* − 0.002 − 0.005* − 0.002** − 0.002 − 0.003* − 0.014* − 0.012* − 0.012* − 0.001* − 0.002* − 0.001
(− 3.72) (− 1.17) (− 3.25) (− 2.09) (− 1.24) (− 3.26) (− 3.26) (− 2.97) (− 2.96) (− 5.48) (− 5.65) (− 0.42)
16
NI/TI − 0.034* − 0.032** − 0.013 − 0.023** − 0.024 − 0.025* − 0.002 − 0.014*** − 0.019* − 0.003* − 0.002* − 0.003*
(− 5.02) (− 2.03) (− 0.73) (− 2.01) (− 0.79) (− 3.44) (− 0.20) (− 1.68) (− 3.75) (− 4.07) (− 5.40) (− 3.88)
BC 0.503 0.657 0.474 0.251 0.035* 0.045 0.048*** 0.061*** 0.038 0.438* 0.243 0.408
(1.10) (1.29) (0.96) (1.17) (6.82) (1.22) (1.77) (1.68) (1.16) (3.68) (0.62) (1.28)
FI − 0.241** − 0.056 − 0.251* − 0.434* − 0.404* − 0.415* − 0.555* − 0.521* − 0.499* − 0.463* − 0.726* − 0.437*
(− 2.10) (− 0.36) (− 2.43) (− 4.20) (− 3.92) (− 3.30) (− 3.17) (− 3.08) (− 2.89) (− 3.25) (− 4.32) (− 2.70)
DC 0.001 − 0.002 − 0.003 0.005 0.001** 0.002 0.013* 0.013* 0.012* 0.002* 0.002* 0.004*
(0.68) (− 0.68) (− 1.12) (1.14) (2.07) (0.50) (4.14) (4.05) (3.22) (4.28) (4.28) (3.31)
DI 0.035 0.036 0.051** 0.371* 0.405* 0.328* 1.016* 0.859 1.081* 0.201 0.042 0.529**
(1.31) (0.29) (2.02) (2.78) (4.11) (4.11) (2.71) (1.30) (4.18) (0.34) (1.20) (2.11)
DRI − 0.011** − 0.014* − 0.016* − 0.031** − 0.026* − 0.019** − 0.059* − 0.034* − 0.022* − 0.038* − 0.092* − 0.068***
(− 2.08) (− 4.88) (3.58) (− 1.91) (− 2.94) (− 1.96) (− 4.04) (− 3.67) (− 3.12) (− 2.83) (− 4.76) (− 1.86)
Time & FC dummies YES YES YES YES YES YES YES YES YES YES YES YES
Hansen-test (0.415) (0.392) (0.336) (0.386) (0.304) (0.337) (0.486) (0.447) (0.471) (0.533) (0.522) (0.570)
Sargan-test (0.307) (0.438) (0.285) (0.489) (0.536) (0.428) (0.553) (0.428) (0.359) (0.452) (0.447) (0.374)
M2- test (0.328) (0.324) (0.327) (0.426) (0.534) (0.528) (0.540) (0.557) (0.533) (0.362) (0.342) (0.356)
Note: Table 8 shows the effect of domestic risk sub-indices on banking sector risk-taking (2004–2017). Time & FC dummies include both time and global financial crisis (2008–09).
Heliyon 9 (2023) e20398

medium and high-income countries. Besides, the results support the study [14] showing that deposit insurance (DI) positively impacts
risk-taking. Moreover, the results show that a rise in political, economic, and financial risks significantly triggers banks to involve
excessive risk-taking activities to compensate for unexpected future losses and avoid earnings volatility, confirming the previous
studies [17,32].
Third, this study re-estimates Eq. (1) by using the new proxies mentioned in Table 7 and grouping countries based on institutional
quality (WGI) level which is defined by World Bank. This work assumes a country is in the low (high) institutional quality level if the
WGI score is placed below (above) the average overall score considering all investigated countries. Table 9 shows that a rise (decline)
in countries’ WGI increases (decreases) banking sector stability, especially in the high WGI countries. Consistently, the recent study by
Ref. [63,91] confirmed that WGI positively impacts bank profitability and a rise in WGI (e.g., political stability) increases banks’
profitability and stability.
6. Conclusion
This study examines the impacts of country risk factors, particularly the political, economic, and financial risks, on banking sector
stability from a global perspective. Further, this study aims to answer how the countries’ income and risk levels impact this rela
tionship. To fill the gaps, the present study contributes by providing a comprehensive framework to examine the country risk factors
particularly the political, economic, and financial risks on banking sector stability of 107 countries between 2004 and 2017. Likewise,
we grouped countries based on the World Bank and PRS Group definitions into the low-medium-high income and low and high-risk
levels.
The results suggest that the stability in the banking sector increases with a declining country’s vulnerability, particularly to po
litical, economic, and financial risks, and this positive effect is more pronounced as they move from low to medium and high-income
countries. Besides, the results underscore that a decline in country risk increases banking sector stability in both low and high-risk
countries though the effect is more pronounced in countries having low domestic risk. Moreover, the results suggest that the
banking sector-specific and country-level factors significantly impact stability though the size and sign of coefficients vary based on the
countries’ income and risk levels.
Our findings suggest several recommendations. First, it suggests to governments and regulatory bodies consider the importance of
country risk in their making decision and effectively managing the economic, political, and financial risks help to increase the stability
of the banking industry. Banking sector instability adversely impacts financial market stability and real sector activities, resulting in
Table 9
Robustness test III.
Independent variables Panel A: Dependent variable (Ln(Z)) Panel B: Dependent variable (σ(ROA))
Low institutional quality (N = High Institutional quality (N Low Institutional quality (N = High Institutional quality (N
52) = 55) 52) = 55)
Lagged dependent 0.872* 0.849* 0.805* 0.736*

variable
(3.96) (5.66) (4.37) (4.15)
C/TA 0.308* 0.169* − 0.004* − 0.002*
(3.94) (4.98) (− 4.32) (− 2.67)
NPL/GL − 0.115*** − 0.009 0.003* 0.001*
(− 1.76) (− 0.46) (3.76) (3.30)
OC/TA − 0.134** − 0.069 0.061** 0.003
(− 2.03) (− 0.76) (2.08) (1.09)
BA/GDP − 0.017 − 0.032*** 0.018*** 0.015
(− 0.89) (− 1.86) (1.78) (0.99)
BAC 0.022** 0.040** − 0.031* − 0.012**
(2.53) (2.17) (− 4.18) (− 2.08)
NI/TI 0.062* 0.042* − 0.003* − 0.002*
(4.74) (5.01) (− 3.36) (− 3.02)
BC − 0.078 − 0.545* 0.003 0.353*
(− 1.60) (− 4.22) (0.44) (2.84)
FI 0.064*** 0.343*** − 0.153* − 0.549*
(1.84) (1.76) (− 2.86) (− 4.96)
DC − 0.036* − 0.062* 0.001 0.003*
(− 4.20) (− 4.47) (1.03) (3.08)
DI − 0.011*** − 0.038* 0.007** 0.036*
(− 1.72) (− 4.02) (2.11) (2.71)
WGI 0.422** 0.832* − 0.391*** − 0.879*
(2.09) (4.02) (− 1.68) (− 5.26)
Time & FC dummies YES YES YES YES
Hansen-test (0.463) (0.446) (0.466) (0.472)
Sargan-test (0.358) (0.553) (0.623) (0.424)
M2- test (0.344) (0.355) (0.384) (0.371)
Note: Table 9 shows the effect of institutional quality on banking sector stability and risk-taking in low and high-institutional-quality countries
between 2004 and 2017. Time & FC dummies include both time and global financial crisis (2008–09).
17
less effective resource allocation and increased uncertainty about future output growth. This can be achievable by controlling the
economic risk through various channels such as executing prudent fiscal and monetary policies (e.g., decreasing inflation, rising GDP)
and encouraging economic diversity, and political risk by increasing governance quality, enforcing solid institutions, diminishing
corruption, increasing government effectiveness, decreasing internal and external conflicts, and implementing the rule of law, and also
financial risk by decreasing exchange rate volatility and rising current account surplus. Besides, governments need to create solid risk
management frameworks, complete with regulatory measures and supervisory systems to maintain a close watch on economic, po
litical, and financial risks in the banking industry.
Second, the results suggest bank managers prioritize a variety of steps to mitigate the impact of country risks. 1) Bank managers
should be applied an efficient risk management framework by proactively monitoring economic data, geopolitical events, and reg
ulatory changes. 2) Bank managers should be followed regulatory standards and conduct stress tests to assess capital adequacy to
sustain unexpected losses amid instability. 3) Bank managers to mitigate economic and financial shocks should diversify product
offerings and penetrate new markets. 4) Bank managers should be enhanced the internal governance quality through increasing
transparency, accountability, independent board monitoring, and effective risk reporting to better manage external domestic, and
global shocks.
Third, the results suggest that banks’ managers for maintaining stability should be focused on reducing non-performing loans and
inefficiency and also increasing financial inclusion. Notably, bank managers in low and middle-income countries should be applied
better credit risk management practices, diversify revenue sources, maintain cost efficiency, and provide more accessibility to financial
services to enhance the bank’s overall performance.
It would be beneficial for further studies to examine the short- and long-term effects of country risk factors on the banking sector
stability (or risk-taking). Also, it would be noteworthy to examine the impact of foreign risks (e.g., global economic policy uncertainty)
on banks’ stability either regionally or globally.
Author contribution statement
Seyed Alireza Athari: Conceived and designed the experiments; Performed the experiments; Analyzed and interpreted the data;
Contributed reagents, materials, analysis tools or data; Wrote the paper.
Farid Irani: Analyzed and interpreted the data; Contributed reagents, materials, analysis tools or data; Wrote the paper.
Abobaker Al.Al: Analyzed and interpreted the data; Wrote the paper.
Data availability statement
Data will be made available on request.
Additional information
No additional information is available for this paper.
Declaration of competing interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to
influence the work reported in this paper.
Appendix
Appendix 1
List of sample countries and mean value of some variables
Ln(Z) σ(ROA) PRI ERI FRI DRI WGI
Country name Panel (A): Low-income countries

Burkina Faso 1.998 0.593 57.375 32.827 33.452 61.827 0.366
Ethiopia 2.273 0.608 49.533 31.423 36.009 58.483 0.957
Gambia, The 2.254 1.177 63.488 31.893 31.324 63.353 0.577
Guinea 1.801 1.267 46.461 28.411 29.485 52.179 1.168
Haiti 2.392 0.312 43.393 30.744 37.685 55.911 1.191
Madagascar 1.794 0.826 58.089 30.676 33.958 61.362 0.567
Malawi 2.679 1.219 55.187 30.967 33.307 59.731 0.373
Mali 2.213 0.521 55.821 33.530 36.476 62.914 0.531
Mozambique 1.406 0.895 65.887 27.935 31.616 62.719 0.439
Niger 2.708 0.426 51.658 30.655 31.961 57.137 0.636
Sierra Leone 1.542 1.929 59.336 28.932 32.128 60.198 0.731
(continued on next page)
18
Appendix 1 (continued )
Sudan 2.725 0.681 40.863 30.610 31.092 51.283 1.569

Tanzania 2.383 0.625 61.470 30.985 35.060 63.758 0.414
Togo 1.546 1.678 51.667 32.911 36.708 60.643 0.892
Uganda 2.491 0.654 52.327 31.887 37.908 61.061 0.595
Yemen, Rep. 2.591 0.589 53.378 29.512 39.631 61.261 1.340
Panel (B): Middle-income countries
Albania 2.658 0.315 66.768 33.080 36.818 68.333 − 0.204
Algeria 2.701 0.236 58.619 38.488 46.265 71.686 − 0.820
Angola 2.404 0.328 55.848 35.914 41.000 66.381 − 1.070
Argentina 1.821 0.511 66.125 35.824 36.494 69.222 − 0.251
Armenia 2.417 0.644 59.018 33.313 36.378 64.355 − 0.279
Azerbaijan 2.006 1.871 61.967 36.685 43.878 71.265 − 0.803
Bangladesh 2.004 0.727 50.568 34.905 41.595 63.534 − 0.908
Belarus 1.291 0.952 58.729 31.470 35.000 62.600 − 0.835
Bolivia 2.508 0.389 58.798 36.890 42.878 69.283 − 0.586
Botswana 2.038 0.339 74.512 38.866 45.813 79.596 0.689
Brazil 2.746 0.682 65.821 35.310 38.295 69.713 − 0.031
Bulgaria 2.060 1.237 68.708 35.190 35.747 69.823 0.204
Cameroon 2.266 0.484 58.381 35.682 40.485 67.274 − 0.923
China 2.905 0.240 62.321 40.259 47.247 74.914 − 0.521
Colombia 1.762 0.380 59.477 35.708 38.223 66.704 − 0.347
Costa Rica 2.916 0.261 72.054 34.845 39.637 73.268 0.590
Cote d’Ivoire 2.857 0.510 45.938 35.771 37.402 59.556 − 1.024
Dominican, Rep. 3.250 0.188 66.774 35.545 37.845 70.082 − 0.320
Ecuador 1.605 0.875 55.259 35.592 37.884 64.368 − 0.693
Egypt 2.830 0.222 54.792 30.938 39.551 62.641 − 0.710
El Salvador 3.225 0.577 65.985 34.229 36.494 68.354 − 0.161
Gabon 2.586 0.633 58.426 42.417 41.827 71.335 − 0.579
Ghana 2.023 1.332 65.479 30.845 36.726 66.525 0.041
Guatemala 2.895 0.141 62.393 34.378 39.890 68.331 − 0.601
Guyana 2.573 0.278 60.354 28.899 35.429 62.341 − 0.361
Honduras 3.345 0.180 59.696 32.188 38.536 65.210 − 0.608
India 2.793 0.208 61.393 34.286 42.991 69.335 − 0.248
Indonesia 1.601 0.268 57.482 36.563 39.250 66.648 − 0.443
Iraq 3.052 1.059 38.491 32.179 37.765 54.218 − 1.509
Jamaica 2.067 0.807 72.265 29.863 34.229 68.179 0.048
Jordan 3.968 0.201 66.679 32.533 39.554 69.383 − 0.054
Kazakhstan 1.386 6.466 68.967 37.315 35.750 71.016 − 0.547
Kenya 2.852 0.571 56.461 31.536 38.503 63.250 − 0.659
Lebanon 3.504 0.109 56.063 29.807 32.458 59.164 − 0.681
Malaysia 2.746 0.566 73.232 40.443 41.943 77.809 0.338
Nigeria 2.785 3.164 44.494 35.068 44.521 62.042 − 1.121
Pakistan 2.360 1.001 47.304 32.503 38.313 59.060 − 1.051
Paraguay 2.750 0.403 56.783 35.667 40.747 66.599 − 0.638
Peru 2.786 0.302 63.065 38.128 41.518 71.356 − 0.252
Philippines 2.883 0.202 62.098 38.134 41.476 70.854 − 0.420
Romania 1.798 0.776 67.836 33.601 36.164 68.801 0.133
Russian, Fed. 1.982 0.470 61.872 38.455 43.643 71.985 − 0.729
Thailand 1.825 0.218 58.318 38.068 42.336 69.361 − 0.261
Ukraine 1.481 2.975 63.461 31.473 34.563 64.749 − 0.608
Panel (C): High-income countries
Australia 2.660 0.284 85.241 39.655 33.708 79.302 1.592
Austria 3.150 0.309 85.229 40.006 37.991 81.613 1.548
Bahamas, The 2.805 0.967 82.042 34.967 37.762 77.386 0.937
Bahrain 2.714 0.430 68.890 41.104 40.583 75.289 0.025
Belgium 2.781 0.414 81.104 39.711 38.149 79.482 1.305
Canada 2.747 0.225 86.271 40.521 39.967 83.380 1.624
Chile 1.958 0.206 76.884 39.738 39.241 77.932 1.149
Croatia 1.557 0.391 72.405 34.940 34.503 70.924 0.414
Cyprus 1.956 0.979 76.988 35.976 36.261 74.613 1.015
Czech Republic 2.570 0.191 77.503 37.199 38.670 76.686 0.907
Denmark 2.797 0.251 81.515 41.366 43.327 83.104 1.790
Estonia 1.707 2.127 74.318 38.003 31.092 71.707 1.093
Finland 2.475 0.175 90.012 40.920 35.658 83.295 1.838
France 2.842 0.223 74.202 37.369 37.113 74.342 1.200
Germany 2.846 0.159 84.128 42.077 41.045 83.625 1.489
Greece 1.166 2.114 71.616 33.384 31.527 68.264 0.443
Hong Kong, China 2.577 0.297 79.729 43.964 41.744 82.719 1.453
Hungary 1.763 0.763 76.506 35.780 33.033 72.660 0.719
Iceland 0.350 1.447 86.408 36.042 30.994 76.722 1.579
(continued on next page)
19
Appendix 1 (continued )
Ireland 1.357 1.129 84.625 38.801 35.405 79.416 1.481

Israel 3.337 0.266 65.307 40.693 40.943 73.472 0.629
Italy 2.636 0.584 76.080 37.018 36.381 74.740 0.560
Japan 2.659 0.149 81.530 38.792 43.866 82.094 1.266
Kuwait 2.778 0.446 71.932 45.289 45.485 81.353 0.056
Latvia 1.736 1.098 72.991 35.929 31.777 70.349 0.702
Lithuania 1.735 1.197 74.336 36.360 35.202 72.949 0.800
Luxembourg 3.467 0.230 90.574 43.241 42.241 88.028 1.697
Malta 3.280 0.509 82.440 36.589 35.673 77.351 1.152
Netherlands 2.158 0.483 84.720 41.482 38.753 82.478 1.668
New Zealand 3.056 0.324 87.601 38.557 34.563 80.361 1.794
Norway 2.082 0.208 88.116 46.539 46.131 90.393 1.733
Oman 2.990 0.238 73.643 42.057 44.342 80.021 0.226
Panama 3.706 0.236 72.940 37.080 36.875 73.448 0.111
Poland 2.151 0.277 77.083 37.170 36.824 75.539 0.721
Portugal 2.336 0.772 78.747 34.693 35.051 74.246 1.033
Qatar 3.287 0.278 72.697 47.006 39.702 79.703 0.512
Saudi Arabia 2.867 0.288 67.515 42.664 46.182 78.181 − 0.348
Singapore 3.175 0.171 83.238 45.190 45.051 86.740 1.521
Slovak Republic 2.785 0.242 75.542 37.122 35.988 74.326 0.756
Slovenia 1.037 1.710 75.616 37.292 34.003 73.456 0.947
Spain 2.926 0.449 74.318 36.875 35.372 73.283 0.886
Sweden 2.435 0.186 88.057 43.470 39.515 85.521 1.755
Switzerland 2.460 0.497 87.911 44.119 45.301 88.666 1.742
Trinidad & Tobago 3.262 0.330 70.339 39.440 45.988 77.884 0.159
United Kingdom 2.035 0.235 81.107 36.634 38.140 77.941 1.429
United States 3.339 0.281 81.845 37.619 33.101 76.283 1.262
Uruguay 1.741 0.545 71.798 36.500 35.527 71.913 0.785
Appendix A2
Panel unit root test results
Variables Panel (A): Levin–Lin–Chu (2002) Panel (B): Im–Pesaran–Shin (2003)
With trend With cross-sectional dependence With trend With cross-sectional dependence
Ln (Z) − 4.443* − 3.535* − 4.524* − 5.296*

RQ/RA − 5.326* − 5.417* − 5.643* − 2.247**
NPL/GL − 3.514* − 4.664* − 3.352* − 4.355*
C/I − 6.267* − 4.282* − 4.575* − 3.324*
DA/GDP − 3.231* − 5.494* − 4.447* − 4.264*
LI − 2.425* − 2.217** − 6.538* − 5.732*
NI/TI − 3.678* − 4.753* − 4.743* − 4.329*
FI − 4.214* − 6.526* − 4.522* − 2.224**
DC − 5.456* − 5.744* − 2.143** − 5.584*
DRI − 2.374** − 3.337* − 5.364* − 4.564*
PRI − 4.532* − 4.283* − 3.666* − 4.359*
ERI − 2.121** − 2.125** − 5.445* − 5.845*
FRI − 5.359* − 5.474* − 6.654* − 4.286*
Note: Table A2 shows the panel unit root test results employing Levin–Lin–Chu (LLC) and Im–Pesaran–Shin (IPS) unit root test (H0: Panels include
unit roots). The symbols *, **, and *** imply statistical significance at the 1%, 5%, and 10% levels, correspondingly.
Appendix A3
Granger causality test
Null Hypothesis F-statistics [Prob. value] Granger Causality
RQ/RA → Ln (Z) 5.351* [0.000] Yes

NPL/GL → Ln (Z) 2.202** [0.022] Yes
C/I → Ln (Z) 4.276* [0.001] Yes
DA/GDP → Ln (Z) 4.412* [0.000] Yes
LI → Ln (Z) 5.656* [0.003] Yes
NI/TI → Ln (Z) 2.184** [0.035] Yes
FI → Ln (Z) 4.536* [0.000] Yes
DC → Ln (Z) 2.243** [0.042] Yes
DRI → Ln (Z) 4.365* [0.001] Yes
PRI → Ln (Z) 5.427* [0.000] Yes
ERI → Ln (Z) 4.365* [0.000] Yes
FRI → Ln (Z) 2.125** [0.027] Yes
Note: * and ** imply 1% and 5% statistical significance levels, respectively.
20
References
[1] Robert Stewart, Murshed Chowdhury, Vaalmikki Arjoon, Bank stability and economic growth: trade-offs or opportunities? Empir. Econ. 61 (2) (2021) 827–853.
[2] Seyed Alireza Athari, Financial inclusion, political risk, and banking sector stability: evidence from different geographical regions, Econ. Bull. (2022).
[3] Xiaoqiang Cheng, Hans Degryse, The impact of bank and non-bank financial institutions on local economic growth in China, J. Financ. Serv. Res. 37 (2010)
179–199.
[4] Mehmet Balcilar, Rangan Gupta, Chien-Chiang Lee, Godwin Olasehinde-Williams, The synergistic effect of insurance and banking sector activities on economic
growth in Africa, Econ. Syst. 42 (4) (2018) 637–648.
[5] Ana I. Fernández, Francisco González, Suárez Nuria, Banking stability, competition, and economic volatility, J. Financ. Stabil. 22 (2016) 101–120.
[6] Manju Jayakumar, Rudra P. Pradhan, Saurav Dash, Rana P. Maradana, Kunal Gaurav, Banking competition, banking stability, and economic growth: are
feedback effects at work? J. Econ. Bus. 96 (2018) 15–41.
[7] Frederic S. Mishkin, Global financial instability: framework, events, issues, J. Econ. Perspect. 13 (4) (1999) 3–20.
[8] Dinh Hoang Bach Phan, Bernard Njindan Iyke, Susan Sunila Sharma, Yoga Affandi, Economic policy uncertainty and financial stability–Is there a relation? Econ.
Modell. 94 (2021) 1018–1029.
[9] John H. Boyd, Gianni De Nicolo, The theory of bank risk taking and competition revisited, J. Finance 60 (3) (2005) 1329–1343.
[10] Seyed Alireza Athari, Farid Irani, Does the country’s political and economic risks trigger risk-taking behavior in the banking sector: a new insight from regional
study, Journal of Economic Structures 11 (1) (2022) 1–10.
[11] David F. Tennant, R. Tracey Marlon, Financial Intermediation and Stock Market Volatility in a Small Bank-Dominated Economy, The Journal of Developing
Areas, 2014, pp. 73–95.
[12] Altaee Hatem Hatef Abdulkadhim, M. Ibaa, Anis Talo, and Mustafa Hassan Mohammad adam. "Testing the financial stability of banks in GCC countries: pre and
post financial crisis.", Int. J. Bus. Soc. Res. 3 (4) (2013) 93–105.
[13] M. Mostak Ahamed, Sushanta K. Mallick, Is financial inclusion good for bank stability? International evidence, J. Econ. Behav. Organ. 157 (2019) 403–427.
[14] Vasso P. Ioannidou, María Fabiana Penas, Deposit insurance and bank risk-taking: evidence from internal loan ratings, J. Financ. Intermediation 19 (1) (2010)
95–115.
[15] Mohamed Belkhir, Jocelyn Grira, M. Kabir Hassan, Issouf Soumaré, Islamic banks and political risk: international evidence, Q. Rev. Econ. Finance 74 (2019)
39–55.
[16] Hamed Rezgallah, Nesrin Özataç, Salih Katircioğlu, The impact of political instability on risk-taking in the banking sector: international evidence using a
dynamic panel data model (System-GMM), Manag. Decis. Econ. 40 (8) (2019) 891–906.
[17] Ajim Uddin, Mohammad Ashraful Ferdous Chowdhury, Sanjay Deb Sajib, Mansur Masih, Revisiting the impact of institutional quality on post-GFC bank risk-
taking: evidence from emerging countries, Emerg. Mark. Rev. 42 (2020), 100659.
[18] Mario Quagliariello, Macroeconomic uncertainty and banks’ lending decisions: the case of Italy, Appl. Econ. 41 (3) (2009) 323–336.
[19] M. Kabir Hassan, Neal C. Maroney, Hassan Monir El-Sady, Telfah Ahmad, Country risk and stock market volatility, predictability, and diversification in the
Middle East and Africa, Econ. Syst. 27 (1) (2003) 63–82.
[20] Seyed Alireza Athari, Komeil Shaeri, Dervis Kirikkaleli, Hasan Murat Ertugrul, Ozun Alper, Global competitiveness and capital flows: does stage of economic
development and risk rating matter? Asia-Pacific Journal of Accounting & Economics 27 (4) (2020) 426–450.
[21] Kent D. Miller, A framework for integrated risk management in international business, J. Int. Bus. Stud. 23 (1992) 311–331.
[22] Kirt C. Butler, Domingo Castelo Joaquin, A note on political risk and the required return on foreign direct investment, J. Int. Bus. Stud. 29 (1998) 599–607.
[23] Stefan Eichler, Karol Sobański, National politics and bank default risk in the eurozone, J. Financ. Stabil. 26 (2016) 247–256.
[24] Mohammad Bitar, M. Kabir Hassan, Thomas Walker, Political systems and the financial soundness of Islamic banks, J. Financ. Stabil. 31 (2017) 18–44.
[25] Christian Calmes, Raymond Théoret, Bank systemic risk and macroeconomic shocks: Canadian and US evidence, J. Bank. Finance 40 (2014) 388–402.
[26] Seyed Alireza Athari, Domestic political risk, global economic policy uncertainty, and banks’ profitability: evidence from Ukrainian banks, Post Commun. Econ.
33 (4) (2021) 458–483.
[27] Christopher F. Baum, Mustafa Caglayan, Ozkan Neslihan, The second moments matter: the impact of macroeconomic uncertainty on the allocation of loanable
funds, Econ. Lett. 102 (2) (2009) 87–89.
[28] Ugo Albertazzi, Tiziano Ropele, Gabriele Sene, Federico Maria Signoretti, The impact of the sovereign debt crisis on the activity of Italian banks, J. Bank.
Finance 46 (2014) 387–402.
[29] Benjamin Keddad, Christophe Schalck, Evaluating sovereign risk spillovers on domestic banks during the European debt crisis, Econ. Modell. 88 (2020)
356–375.
[30] Fenghua Song, Anjan Thakor, Notes on financial system development and political intervention, World Bank Econ. Rev. 27 (3) (2013) 491–513.
[31] Aneta Hryckiewicz, What do we know about the impact of government interventions in the banking sector? An assessment of various bailout programs on bank
behavior, J. Bank. Finance 46 (2014) 246–265.
[32] Cantero-Saiz Maria, Sergio Sanfilippo-Azofra, Begoña Torre-Olmo, Carlos López-Gutiérrez, Sovereign risk and the bank lending channel in Europe, J. Int. Money
Finance 47 (2014) 1–20.
[33] Saibal Ghosh, Political transition and bank performance: how important was the Arab Spring? J. Comp. Econ. 44 (2) (2016) 372–382.
[34] Badar Nadeem Ashraf, Political institutions and bank risk-taking behavior, J. Financ. Stabil. 29 (2017) 13–35.
[35] Wenjing Huang, Xinyu Gu, Linting Lin, Majed Alharthi, Muhammad Usman, Do financial inclusion and income inequality matter for human capital? Evidence
from sub-Saharan economies, Borsa Istanbul Review 23 (1) (2023) 22–33.
[36] Özşuca, Ekin Ayşe, Elif Akbostancı, An empirical analysis of the risk-taking channel of monetary policy in Turkey, Emerg. Mark. Finance Trade 52 (3) (2016)
589–609.
[37] Ameni Ghenimi, Hasna Chaibi, Mohamed Ali Brahim Omri, The effects of liquidity risk and credit risk on bank stability: evidence from the MENA region, Borsa
Istanbul Review 17 (4) (2017) 238–248.
[38] M. Kabir Hassan, Ashraf Khan, Andrea Paltrinieri, Liquidity risk, credit risk and stability in Islamic and conventional banks, Res. Int. Bus. Finance 48 (2019)
17–31.
[39] Nesrine Djebali, Khemais Zaghdoudi, Threshold effects of liquidity risk and credit risk on bank stability in the MENA region, J. Pol. Model. 42 (5) (2020)
1049–1063.
[40] Ali Mirzaei, Tomoe Moore, Guy Liu, Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies, J. Bank. Finance 37
(8) (2013) 2920–2937.
[41] Matthias Köhler, Which banks are more risky? The impact of business models on bank stability, J. Financ. Stabil. 16 (2015) 195–212.
[42] Nicholas Apergis, Competition in the banking sector: new evidence from a panel of emerging market economies and the financial crisis, Emerg. Mark. Rev. 25
(2015) 154–162.
[43] Saadet Kasman, Adnan Kasman, Bank competition, concentration and financial stability in the Turkish banking industry, Econ. Syst. 39 (3) (2015) 502–517.
[44] Habib Hussain Khan, Rubi Binti Ahmad, Chan Sok Gee, Bank competition and monetary policy transmission through the bank lending channel: evidence from
ASEAN, Int. Rev. Econ. Finance 44 (2016) 19–39.
[45] Yong Tan, The impacts of competition and shadow banking on profitability: evidence from the Chinese banking industry, N. Am. J. Econ. Finance 42 (2017)
89–106.
[46] Benjamin M. Tabak, Guilherme MR. Gomes, Maurício da Silva Medeiros Jr., The impact of market power at bank level in risk-taking: the Brazilian case, Int. Rev.
Financ. Anal. 40 (2015) 154–165.
[47] Noman Abu Hanifa Md, Chan Sok Gee, Isa Che Ruhana, Does bank regulation matter on the relationship between competition and financial stability? Evidence
from Southeast Asian countries, Pac. Basin Finance J. 48 (2018) 144–161.
21
[48] Martin R. Goetz, Competition and bank stability, J. Financ. Intermediation 35 (2018) 57–69.
[49] Inka Yusgiantoro, Wahyoe Soedarmono, Tarazi Amine, Bank consolidation and financial stability in Indonesia, International Economics 159 (2019) 94–104.
[50] Céline Meslier, Tacneng Ruth, Tarazi Amine, Is bank income diversification beneficial? Evidence from an emerging economy, J. Int. Financ. Mark. Inst. Money
31 (2014) 97–126.
[51] Bana Abuzayed, Nedal Al-Fayoumi, Phil Molyneux, Diversification and bank stability in the GCC, J. Int. Financ. Mark. Inst. Money 57 (2018) 17–43.
[52] R. AlKhouri, H. Arouri, The effect of diversification on risk and return in banking sector, Int. J. Manag. Finance 15 (2019) 100–128.
[53] A. Paltrinieri, A. Dreassi, S. Rossi, A. Khan, Risk-adjusted profitability and stability of Islamic and conventional banks: does revenue diversification matter?
Global Finance J. (2020), 100517. .
[54] Simon Neaime, Isabelle Gaysset, Financial inclusion and stability in MENA: evidence from poverty and inequality, Finance Res. Lett. 24 (2018) 230–237.
[55] Duc Hong Vo, Nhan Thien Nguyen, Loan Thi-Hong Van, Financial inclusion and stability in the Asian region using bank-level data, Borsa Istanbul Review 21 (1)
(2021) 36–43.
[56] Xiaohui Hou, Qing Wang, Qi Zhang, Market structure, risk taking, and the efficiency of Chinese commercial banks, Emerg. Mark. Rev. 20 (2014) 75–88.
[57] Md Dulal Miah, Kashfia Sharmeen, "Relationship between capital, risk and efficiency: a comparative study between Islamic and conventional banks of
Bangladesh.", in: International Journal of Islamic and Middle Eastern Finance and Management, 2015.
[58] Yun Luo, Sailesh Tanna, Glauco De Vita, Financial openness, risk and bank efficiency: cross-country evidence, J. Financ. Stabil. 24 (2016) 132–148.
[59] Chaiporn Vithessonthi, Jittima Tongurai, Financial markets development, business cycles, and bank risk in South America, Res. Int. Bus. Finance 36 (2016)
472–484.
[60] Abdul Hamid, Wajahat Azmi Baharom, Mohsin Ali, Bank risk and financial development: evidence from dual banking countries, Emerg. Mark. Finance Trade 56
(2) (2020) 286–304.
[61] A. Demirgüç-Kunt, E. Detragiache, Does deposit insurance increase banking system stability? An empirical investigation, J. Monetary Econ. 49 (7) (2002)
1373–1406.
[62] Deniz Anginer, Asli Demirguc-Kunt, Min Zhu, How does deposit insurance affect bank risk? Evidence from the recent crisis, J. Bank. Finance 48 (2014) 312–321.
[63] Seyed Alireza Athari, Mahboubeh Bahreini, The impact of external governance and regulatory settings on the profitability of Islamic banks: evidence from Arab
markets, Int. J. Finance Econ. 28 (2) (2023) 2124–2147.
[64] Qinwei Chi, Wenjing Li, Economic policy uncertainty, credit risks and banks’ lending decisions: evidence from Chinese commercial banks, China journal of
accounting research 10 (1) (2017) 33–50.
[65] Minghua Chen, Bang Nam Jeon, Rui Wang, Ji Wu, Corruption and bank risk-taking: evidence from emerging economies, Emerg. Mark. Rev. 24 (2015) 122–148.
[66] Chafic Saliba, Panteha Farmanesh, Seyed Alireza Athari, Does country risk impact the banking sectors’ non-performing loans? Evidence from BRICS emerging
economies, Financial Innovation 9 (1) (2023) 1–30.
[67] Kyung So Im, M. Hashem Pesaran, Yongcheol Shin, Testing for unit roots in heterogeneous panels, J. Econom. 115 (1) (2003) 53–74.
[68] Manuel Arellano, Olympia Bover, Another look at the instrumental variable estimation of error-components models, J. Econom. 68 (1) (1995) 29–51.
[69] Richard Blundell, Stephen Bond, Initial conditions and moment restrictions in dynamic panel data models, J. Econom. 87 (1) (1998) 115–143.
[70] Badi Hani Baltagi, Badi H. Baltagi, Econometric Analysis of Panel Data, vol. 4, Wiley, Chichester, 2008.
[71] M. Hassem Pesaran, "General diagnostic tests for cross section dependence in panels. University of cambridge, faculty of economics, cambridge working papers
in economics No. 0435.", Cent. Econ. Stud. Ifo Inst. Econ. Res. CESifo 41 (2004).
[72] Andrew Levin, Chien-Fu Lin, Chia-Shang James Chu, Unit root tests in panel data: asymptotic and finite-sample properties, J. Econom. 108 (1) (2002) 1–24.
[73] Jonathan Williams, Determining management behaviour in European banking, J. Bank. Finance 28 (10) (2004) 2427–2460.
[74] F. Fiordelisi, D. Marques-Ibanez, P. Molyneux, Efficiency and risk in European banking, J. Bank. Finance 35 (5) (2011) 1315–1326.
[75] A.A. Antzoulatos, C. Tsoumas, Institutions, moral hazard and expected government support of banks, J. Financ. Stabil. 15 (2014) 161–171.
[76] Allen N. Berger, Timothy H. Hannan, The efficiency cost of market power in the banking industry: a test of the “quiet life” and related hypotheses, Rev. Econ.
Stat. 80 (3) (1998) 454–465.
[77] Gamze Ozturk Danisman, Pelin Demirel, Bank risk-taking in developed countries: the influence of market power and bank regulations, J. Int. Financ. Mark. Inst.
Money 59 (2019) 202–217.
[78] Allen N. Berger, HS Bouwman Christa, Bank liquidity creation, Rev. Financ. Stud. 22 (9) (2009) 3779–3837.
[79] My Nguyen, Michael Skully, Shrimal Perera, Market power, revenue diversification and bank stability: evidence from selected South Asian countries, J. Int.
Financ. Mark. Inst. Money 22 (4) (2012) 897–912.
[80] H.R. Khan, Financial inclusion and financial stability: are they two sides of the same coin, in: Address by Shri HR Khan, Deputy Governor of the Reserve Bank of
India, 2011, pp. 1–12, at BANCON.
[81] Peter Morgan, Victor Pontines, Financial Stability and Financial Inclusion, 2014.
[82] Athari, Seyed Alireza, Chafic Saliba, Danielle khalife, and Madonna salameh-ayanian "the role of country governance in achieving the banking sector’s
sustainability in vulnerable environments: new insight from emerging economies”. Sustainability, 15(13), 10538..
[83] Enrica Detragiache, Poonam Gupta, Thierry Tressel, Finance in Lower-Income Countries: an Empirical Exploration, 2005.
[84] Jagadish Prasad Bist, Financial development and economic growth: evidence from a panel of 16 African and non-African low-income countries, Cogent
Economics & Finance 6 (1) (2018), 1449780.
[85] Mohammad Al-Shboul, Aktham Maghyereh, Abul Hassan, Phillip Molyneux, Political risk and bank stability in the Middle East and North Africa region, Pac.
Basin Finance J. 60 (2020), 101291.
[86] Jeffrey Frankel, Andrew Rose, An estimate of the effect of common currencies on trade and income, Q. J. Econ. 117 (2) (2002) 437–466.
[87] Brahim Gaies, Stéphane Goutte, Khaled Guesmi, Banking crises in developing countries–What crucial role of exchange rate stability and external liabilities?
Finance Res. Lett. 31 (2019).
[88] Angelos A. Antzoulatos, Chris Tsoumas, Institutions, moral hazard and expected government support of banks, J. Financ. Stabil. 15 (2014) 161–171.
[89] Cuestas, Juan Carlos, Yannick Lucotte, Nicolas Reigl, Banking sector concentration, competition and financial stability: the case of the Baltic countries, Post
Commun. Econ. 32 (2) (2020) 215–249.
[90] Claudio Borio, Philip Lowe, Assessing the risk of banking crises-BIS Quarterly Review 5 (2002). December 2002.
[91] Theodora Bermpei, Antonios Kalyvas, Thanh Cong Nguyen, Does institutional quality condition the effect of bank regulations and supervision on bank stability?
Evidence from emerging and developing economies, Int. Rev. Financ. Anal. 59 (2018) 255–275.
22

Country risk factors and banking sector stability

Uploaded by

Copyright:

Available Formats

Country risk factors and banking sector stability

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Country risk factors and banking sector stability

Uploaded by

Copyright:

Available Formats

Heliyon 9 (2023) e20398

Contents lists available at ScienceDirect