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Published in: Journal of Economics and Finance 4/2022

14-07-2022

Banks’ financial soundness during the COVID-19 pandemic

Authors: Dung Viet Tran, M. Kabir Hassan, Ahmed W. Alam, Nam Dau

Published in: Journal of Economics and Finance | Issue 4/2022

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Abstract

Ever since the COVID-19 pandemic hit the global economy, banks all over the world experienced significant reductions in loan growth and increases in distressed and non-performing assets. The persistent increase in non-performing loans, accompanied by low interest rates, led to a surge in banking risk, posing a solemn threat to banks’ stability. In this paper, we empirically assess the accounting- and market-based risks of banks during the COVID-19 pandemic. Using a quarterly panel of international banks over the period 2020:Q1 – 2021:Q1, we find that banks exhibit greater accounting risk and increased return volatility during the pandemic. In particular, we report that a 1% growth of total COVID cases reduces (increases) our sample banks’ z-score (standard deviation of quarterly return) by 0.756 (2.51%). Our results remain robust across alternative measures of the pandemic, z-score decomposition, and across daily and monthly stock returns. We obtain consistent results for both U.S. and non-U.S. banks, as well as for banks from both high- and low-income economies. We use a propensity score matching strategy to deal with endogeneity. Additional tests reveal that government responses such as economic support, stringency, and containment play important roles in banking risk and stability during the pandemic.
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Footnotes
1
“On 31 December 2019, WHO was informed of cases of pneumonia of unknown cause in Wuhan City, China. A novel coronavirus was identified as the cause by Chinese authorities on 7 January 2020 and was temporarily named “2019-nCOV”…..On 11 March 2020, the rapid increase in the number of cases outside China led the WHO Director-General to announce that the outbreak could be characterized as a pandemic”.
 
2
Globally, as of 8:48 PM CEST, 6 October 2021, there have been 235,673,032 confirmed cases of coronavirus disease, leading to 4,814,651 deaths, reported to WHO. [Source: https://​covid19.​who.​int/​].
 
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Metadata
Title
Banks’ financial soundness during the COVID-19 pandemic
Authors
Dung Viet Tran
M. Kabir Hassan
Ahmed W. Alam
Nam Dau
Publication date
14-07-2022
Publisher
Springer US
Published in
Journal of Economics and Finance / Issue 4/2022
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-022-09591-x

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