Relationship Analysis between Bank Risks and Probability of Default in ASEAN

Abstract

This study aims to investigate the occurrence of causality in banking risks and its impact on probability of default. This study used individual bank data of five countries, i.e: Indonesia, Malaysia, Singapore, Thailand, and the Philippine. In order to investigate whether there is causality in banking risks, we used VAR-Granger Causality model. In addition, OLS regression models are used to investigate the impact of this causality on default probability. Results of this study revealed that the causality between credit risk and liquidity risk only occurred in Malaysia, while the causality between credit risk and interest rate risk occurred in the Philippine, Malaysia, Thailand, and all banks in ASEAN. However, the impact of the interaction between bank risks on default probability is not significant. Furthermore, credit risk, bank size, and gross domestic product are significantly impact probability of default.

Keywords: Bank risks, Probability of default, Causality, ASEAN

JEL Classification: G21, C18