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The Effect of Macroeconomic Conditions on Banks’ Risk and Profitability

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  • Marianne Gizycki

    (Reserve Bank of Australia)

Abstract

This paper examines the overall variability of Australian banks’ credit risk during the 1990s. It assesses the extent to which this overall variability can be explained by variability in the level of banks’ aggregate credit risk over time, or alternatively, by variation in the average credit risk of different banks. The ability of macroeconomic variables to explain movements in bank risk is also considered. Discussion of banks’ credit risk is supplemented with analysis of the rate of return on assets earned by banks since the 1960s. While most of the variability in banks’ credit risk and profitability is due to differences between banks, macroeconomic variables are found to exert a strong influence on banks’ risk and profitability. The share of interest payments in the corporate and household sectors’ income, real credit growth and property prices are most strongly correlated with banks’ risk and profitability.

Suggested Citation

  • Marianne Gizycki, 2001. "The Effect of Macroeconomic Conditions on Banks’ Risk and Profitability," RBA Research Discussion Papers rdp2001-06, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2001-06
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2001/pdf/rdp2001-06.pdf
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    References listed on IDEAS

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    Cited by:

    1. Thakor, Anjan V., 2016. "The highs and the lows: A theory of credit risk assessment and pricing through the business cycle," Journal of Financial Intermediation, Elsevier, vol. 25(C), pages 1-29.
    2. Zuzanna Wośko, 2016. "Credit Risk of FX Loans in Poland. Debt Service Burden and the Effect of Neutralization of Currency Depreciation by Foreign Interest Rates," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 8(1), pages 43-59, March.
    3. Tri Wulandari & Lukytawati Anggraeni & Trias Andat, 2016. "Modeling the profitability of commercial banks in Indonesia," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 8(2), pages 109-119, April.

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    More about this item

    Keywords

    banking; credit risk; cycles;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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