Determinants of credit risk in Southeast Asian banks: Evidence from quantile regression

Abstract

This paper employs the Method of Moments Quantile Regression (MM-QR) and an unbalanced panel dataset of 185 banks from Southeast Asia over the period 2000- 2022 to examine the determinants of bank credit risk across different quantiles of the credit risk distribution. The empirical results indicate that, at the bank level, credit growth, bank size, equity ratio, operational efficiency, and liquidity contribute to lower credit risk, particularly for banks located at the upper tail of the credit risk distribution, whereas income diversification strategies are associated with higher credit risk. This implies that banks should exercise prudence in implementing diversification strategies, pursue credit growth in a selective manner, and strengthen their financial foundations. From a macroeconomic perspective, money supply (M2) growth and economic growth help mitigate credit risk, while inflation and the 2008 global financial crisis significantly exacerbate credit risk. These findings underscore the critical role of proactive, flexible, and well-coordinated monetary policy management, as well as timely and targeted policy interventions, in maintaining the safety and stability of the financial system.