The Determinants of Banking System Stability in Ethiopia: A Panel Regression Analysis
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Date
2024-06-15
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A.A.U
Abstract
Research on the factors influencing stability of banks has shown that both external and bank-specific factors have impacts on banks’ financial stability. Nevertheless, the majority of the studies were carried out in industrialized countries, where banks typically have greater wealth and greater fluidity than banks in developing countries have. This thesis investigates the determinants of banks system stability in Ethiopia through a panel regression analysis encompassing 16 commercial banks for the time period 2015 to 2023. The thesis employed the Generalized Method of Moments (GMM) regression technique to address endogeneity concerns, specifically unobserved heterogeneity. The results show that prior year's banks stability positively affects the current year's stability, suggesting persistence in banks performance. Equity-to-asset ratio (ETA) shows a negative impact on banks stability, indicating that higher efficiency values from previous periods may lead to current volatility. Return on equity (ROE) demonstrates an inverse relationship with banks stability, suggesting that historically high profitability may lead to future instability. Additionally, increased mobilized share capital and economic growth positively correlate with banks stability, indicating that higher capital buffers and favorable economic conditions enhance financial stability. These findings provide valuable insights for policymakers and bank management.
Keywords: Bank Stability, GMM, Z-Score, Ethiopia