Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana
This study assesses the dynamic relationship between macroeconomic factors and bank asset quality based on changes in the condition of stock market returns. A dynamic panel two-step system, the Generalized Method of Moments (system GMM) model, is employed using panel data from 18 universal banks spa...
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MDPI AG
2023-09-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/11/9/158 |
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| author | Richard Apau Athenia Sibindi Leward Jeke |
| author_facet | Richard Apau Athenia Sibindi Leward Jeke |
| author_sort | Richard Apau |
| collection | DOAJ |
| description | This study assesses the dynamic relationship between macroeconomic factors and bank asset quality based on changes in the condition of stock market returns. A dynamic panel two-step system, the Generalized Method of Moments (system GMM) model, is employed using panel data from 18 universal banks spanning the period of 2007 to 2021. The analysis revealed that the real GDP growth rate, the average lending rate, and the real exchange rate represent a set of macroeconomic factors with a marked influence on banks’ asset quality, where a unit increase in these variables drive 0.02 percent, 0.98 percent, and 0.27 percent improvement in asset quality, respectively. In addition, a high-inflation rate was found to exert an adverse effect of −0.32 percent on asset quality, as it affects borrowers’ financial ability to meet loan repayment obligations. Furthermore, the study verified the existence of a positive relationship between market condition and asset quality, where a rise in the market return drives a 0.07 percent improvement in bank asset quality. This implies that bank performance adapts to changes in market conditions as posited under the Adaptive Market Hypothesis (AMH). Bank managers should consolidate banks’ asset bases during conditions of market stability to withstand periodic market fluctuations to boost trading momentum. Policy recommendations are suggested to foster a conducive business environment for bank stability. |
| first_indexed | 2024-03-10T22:04:07Z |
| format | Article |
| id | doaj.art-3df1c17c8e154778917f5934f87c02e4 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-10T22:04:07Z |
| publishDate | 2023-09-01 |
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| series | Risks |
| spelling | doaj.art-3df1c17c8e154778917f5934f87c02e42023-11-19T12:51:16ZengMDPI AGRisks2227-90912023-09-0111915810.3390/risks11090158Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from GhanaRichard Apau0Athenia Sibindi1Leward Jeke2Department of Finance, Risk Management and Banking, University of South Africa, Pretoria 0003, South AfricaDepartment of Finance, Risk Management and Banking, University of South Africa, Pretoria 0003, South AfricaDepartment of Economics, Nelson Mandela University, Port Elizabeth 6001, South AfricaThis study assesses the dynamic relationship between macroeconomic factors and bank asset quality based on changes in the condition of stock market returns. A dynamic panel two-step system, the Generalized Method of Moments (system GMM) model, is employed using panel data from 18 universal banks spanning the period of 2007 to 2021. The analysis revealed that the real GDP growth rate, the average lending rate, and the real exchange rate represent a set of macroeconomic factors with a marked influence on banks’ asset quality, where a unit increase in these variables drive 0.02 percent, 0.98 percent, and 0.27 percent improvement in asset quality, respectively. In addition, a high-inflation rate was found to exert an adverse effect of −0.32 percent on asset quality, as it affects borrowers’ financial ability to meet loan repayment obligations. Furthermore, the study verified the existence of a positive relationship between market condition and asset quality, where a rise in the market return drives a 0.07 percent improvement in bank asset quality. This implies that bank performance adapts to changes in market conditions as posited under the Adaptive Market Hypothesis (AMH). Bank managers should consolidate banks’ asset bases during conditions of market stability to withstand periodic market fluctuations to boost trading momentum. Policy recommendations are suggested to foster a conducive business environment for bank stability.https://www.mdpi.com/2227-9091/11/9/158bank asset qualityreal GDPinflationaverage lending ratereal exchange ratechanging market conditions |
| spellingShingle | Richard Apau Athenia Sibindi Leward Jeke Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana Risks bank asset quality real GDP inflation average lending rate real exchange rate changing market conditions |
| title | Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana |
| title_full | Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana |
| title_fullStr | Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana |
| title_full_unstemmed | Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana |
| title_short | Effect of Macroeconomic Dynamics on Bank Asset Quality under Different Market Conditions: Evidence from Ghana |
| title_sort | effect of macroeconomic dynamics on bank asset quality under different market conditions evidence from ghana |
| topic | bank asset quality real GDP inflation average lending rate real exchange rate changing market conditions |
| url | https://www.mdpi.com/2227-9091/11/9/158 |
| work_keys_str_mv | AT richardapau effectofmacroeconomicdynamicsonbankassetqualityunderdifferentmarketconditionsevidencefromghana AT atheniasibindi effectofmacroeconomicdynamicsonbankassetqualityunderdifferentmarketconditionsevidencefromghana AT lewardjeke effectofmacroeconomicdynamicsonbankassetqualityunderdifferentmarketconditionsevidencefromghana |