Economic uncertainty and bank risk: the moderating role of risk governance

Figures & data

Figure 1. Average of risk governance index from 2005 to 2018.

Source: based on the econometric results obtained.

Table 1. Variable definitions and descriptive statistics.

Variables	Definition	Mean	Std. dev.	Median
Explained variables
z-score	z-score = ln [(return on equity + equity to asset)/ 3-year moving standard deviation of return on equity]	1.7966	0.3753	1.8423
npl	non-performing loan ratio = non-performing loan/total loan	0.0174	0.0236	0.0122
roa	returns of asset = net income / the average of total assets in the two most recent years	0.0097	0.0029	0.0096
roe	return on equity = net income / the average of total equity in the two most recent years	0.1571	0.0451	0.1544
Explanatory variables
eu	economic uncertainty, calculated by the annual average of conditional variance generated from GARCH (1,1)	6.5688	1.2475	6.6939
epu	economic policy uncertainty, developed by Baker et al. (2016), we take the natural logarithm of it. Data available at https://www.policyuncertainty.com/	5.0591	0.5989	4.9943
rgi	risk governance index, calculated by author through principal component analysis of 10 risk governance characteristic indicators referring Ellul and Yerramilli (2013)	0.5666	0.2611	0.5520
rgi_eu	The product of economic uncertainty and risk governance index	4.3157	3.1738	5.1705
Control variables
car	capital adequacy ratio = net capital/risk-weighted assets	0.1309	0.0505	0.1241
tier	tier capital adequacy ratio = net tier capital/risk-weighted assets	0.1097	0.0636	0.0995
ltd	loan-to-deposit ratio = total loan/total deposit	0.6890	0.1031	0.6955
eta	equity-to-asset = total equity/total assets	0.0601	0.0184	0.0613
llr	Loan loss reserves ratio = loan loss reserves /non-performing loan	2.2991	1.1435	2.0985
size	bank size = ln (total assets)	13.4302	1.8332	13.3894
m2gdp	M2/GDP = broad money /gross domestic product	1.8009	0.2016	1.7850
shibor	90-days Shanghai Interbank Offered Rate	0.0317	0.0090	0.0329
rgdp	real GDP growth = (real GDP in current year – real GDP in former year)/ real GDP in former year	0.0911	0.0234	0.0863

Source: Authors’ calculation.

Table 2. Pairwise correlations.

	z-score	npl	roa	roe	Eu	epu	rgi	car
z-score	1.000
roa	0.237***	−0.197***	1.000
roe	0.246***	−0.295***	0.566***	1.000
eu	−0.003***	0.298***	−0.165***	−0.013**	1.000
epu	−0.133***	−0.239***	−0.037	−0.278***	−0.414***	1.000
rgi	0.092	0.111*	0.232***	0.064	−0.035	0.148**	1.000
car	0.204***	−0.267***	0.163***	0.005	−0.096**	0.175***	−0.084	1.000
tier	0.099*	−0.152***	0.421***	−0.038	−0.073	0.147***	−0.036	0.792***
ltd	−0.021	−0.003	−0.112**	−0.225***	−0.082*	0.272***	0.173***	0.065
eta	0.073	−0.531***	0.268***	−0.182***	−0.317***	0.386***	0.209***	0.366***
llr	0.156***	−0.447***	0.299***	0.270***	−0.352***	0.201***	−0.155***	0.142***
size	0.172***	0.031	0.013	−0.061	−0.290***	0.327***	0.626***	0.136***
m2gdp	−0.133***	−0.257***	−0.044	−0.305***	−0.696***	0.732***	0.195***	0.077
shibor	0.035	−0.228***	0.230***	0.019	−0.648***	0.428***	0.054	0.117**
rgdp	0.087*	0.315***	−0.069	0.178***	0.792***	−0.790***	−0.166***	−0.157***

Table 2. Pairwise correlations (continued).

	tier	ltd	eta	llr	Size	m2gdp	shibor	rgdp
tier	1.000
ltd	0.097**	1.000
eta	0.316***	0.071	1.000
llr	0.067	−0.174***	0.189***	1.000
size	0.088*	0.363***	0.058	−0.100**	1.000
m2gdp	0.065	0.202***	0.373***	0.268***	0.384***	1.000
shibor	0.103**	0.099**	0.307***	0.371***	0.238***	0.412***	1.000
rgdp	−0.123**	−0.184***	−0.410***	−0.319***	−0.364***	−0.883***	−0.506***	1.000

Note: This table summarizes the pairwise correlation of main variables and significance.

* , ** and *** denote significance threshold at 10%, 5% and 1%, respectively. Source: Authors’ calculation.

Table 3. Estimation results by pooled OLS.

	Baseline model		Moderating effect of rgi		H-share & A + H-share banks		A-share banks
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
	roa	z-score	roa	z-score	roa	z-score	Roa	z-score
eu	−0.0004***	−0.0436*	−0.0006***	−0.0890***	−0.0006**	−0.1200***	−0.0006***	−0.0887*
	(−2.62)	(−1.67)	(−4.25)	(−2.77)	(−2.29)	(−3.03)	(−3.02)	(−1.84)
rgi			0.0030***	0.4400***	0.0030*	0.6450***	0.0023**	0.2880
			(−3.68)	(−2.91)	(−1.91)	(−3.93)	(−2.49)	(−1.08)
rgi_eu			0.0001**	0.0217**	0.0001	0.0263*	0.0001	0.0208
			(−2.31)	(−2.12)	(−0.97)	(−1.78)	(−1.08)	(−1.41)
tier	0.0353***	−0.683***	0.0358***	−0.683***	−0.00845	−1.074	0.0363***	−0.432***
	−21.57	(−4.41)	(−31.67)	(−5.59)	(−0.43)	(−0.40)	(−66.93)	(−3.33)
car	−0.0349***	1.672***	−0.0342***	1.532***	0.0092	3.278	−0.0333***	0.750**
	(−16.32)	−4.56	(−17.80)	(−4.1)	(−0.39)	(−1.09)	(−25.85)	(−2.45)
size	0.0003***	0.0653***	0.0003***	0.0210	0.0004***	0.0051	0.0002	0.0218
	(−4.63)	(−4.68)	(−4.43)	(−1.05)	(−4.32)	(−0.19)	(−1.55)	(−0.6)
eta	0.0704***	3.6790**	0.0839***	6.4740***	0.0882***	9.0750***	0.0733***	5.6440***
	(−7.87)	(−2.39)	(−9.54)	(−3.46)	(−5.16)	(−2.79)	(−6.52)	(−2.63)
ldr	−0.0035***	−0.0993	−0.0026**	0.4010*	−0.0044**	0.8340***	−0.0017	−0.1570
	(−3.15)	(−0.52)	(−2.49)	−1.86	(−2.15)	−3.09	(−1.19)	(−0.52)
llr	0.0008***	0.0828***	0.0011***	0.1180***	0.00160***	0.0215	0.0007***	0.1810***
	(−5.43)	(−4.16)	(−7.78)	(−4.06)	(−6.72)	(−0.6)	(−4.76)	(−4.74)
shibor	0.0006	−2.9770	−0.0233	−7.2760**	−0.0266	−9.1710**	−0.0107	−9.4440*
	−0.03	(−1.11)	(−1.41)	(−2.18)	(−1.07)	(−2.14)	(−0.51)	(−1.83)
m2gdp	−0.0075***	−0.591***	−0.0069***	−0.676**	−0.0051***	−0.999***	−0.0071***	−0.586
	(−5.37)	(−3.03)	(−4.84)	(−2.41)	(−2.85)	(−3.51)	(−2.97)	(−1.11)
rgdp	−0.0242	1.502	−0.0085	3.465	0.00647	1.9	−0.0127	3.791
	(−1.63)	(−0.76)	(−0.55)	(−1.19)	(−0.33)	(−0.71)	(−0.51)	(−0.71)
cons	0.0153***	1.155*	0.00822*	0.87	0.00092	1.071	0.0113	1.222
	(−3.32)	(−1.94)	(−1.8)	(−0.94)	(−0.17)	(−1.23)	(−1.42)	(−0.73)
N	385	384	277	276	146	145	131	131
adj. R^2	0.513	0.159	0.694	0.223	0.559	0.369	0.827	0.234

Notes: t statistics in parentheses.

* , ** and *** denote significance threshold at 10%, 5% and 1%, respectively. Source: Authors’ calculation.

Table 4. Robustness checks: alternative indicators.

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
	roe	roe	npl	npl	roa	roa	ze	ze
eu	−0.0063***	−0.0120***	0.0018***	0.0018***
	(−2.63)	(−4.16)	(−3.41)	(−4.07)
epu					−0.0009***	−0.0012***	−0.0894*	−0.1580***
					(−3.30)	(−4.61)	(−1.77)	(−2.82)
rgi		0.0451***		−0.0054**		0.00258***		0.376**
		(−3.37)		(−2.06)		(−3.31)		(−2.54)
rgi_eu		0.0014**		−0.0002		0.0001*		0.0189*
		(−2.16)		(−1.37)		(−1.83)		(−1.88)
cons	0.3970***	0.2440**	0.0498**	0.0160	0.0232***	0.0207***	2.0290***	2.5880***
	(−4.5)	(−2.36)	(−2.12)	(−1.08)	(−5.77)	(−5.05)	(−3.4)	(−3.13)
N	385	277	407	277	385	277	384	276
adj. R^2	0.395	0.534	0.423	0.441	0.516	0.695	0.159	0.221

Notes: The estimators of control variables are not reported in order to save space. The t-statistics in parentheses.

* , ** and *** denote significance thresholds at 10%, 5% and 1%, respectively. Source: Authors’ calculations.

Table 5. Robustness checks: alternative econometric methodologies.

	fixed effects				system GMM
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
	roa	roa	ze	ze	roa	roa	Ze	ze
eu	−0.0004***	−0.0006***	−0.0347***	−0.0570***	−0.0003*	−0.0005**	−0.0215*	−0.0429*
	(−5.59)	(−6.51)	(−3.88)	(−4.18)	(−1.71)	(−2.15)	(−1.91)	(−1.74)
rgi		0.0027***		0.2069***		0.0059***		0.2930
		(−3.74)		(−3.1)		(−3.28)		(−1.42)
rgi_eu		0.0001**		0.0092***		0.00035***		0.0244*
		(−2.27)		(−2.68)		(−3.23)		(−1.71)
cons	0.0156***	0.0081**	2.1200***	1.6770**	0.0122	−0.0053	1.3100**	1.1550
	(−3.75)	(−2.08)	(−4.3)	(−2.4)	(−1.02)	(−0.32)	(−2.17)	(−1.22)
N	385	277	384	276	358	269	353	263
AR(2)					0.139	0.117	0.117	0.115
					(−1.48)	(−1.57)	(−1.57)	(−1.58)
Hansen					2.83	3.26	3.53	3.04
					(0.997)	(0.860)	(0.473)	(0.804)

Notes: The estimators of control variables are not reported in order to save space. The t-statistics in parentheses.

* , ** and *** denote significance thresholds at 10%, 5% and 1%, respectively. Source: Authors’ calculation.

Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024

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