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The Role of Credit Risk in Shaping the Profitability of the Banking Sector in the World's Largest Economies: Evidence from Panel Quantile Regression

Author

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  • Emmanuel Ezekiel Mwanjilinji

    (Jiangxi University of Finance and Economics
    University of Dar es Salaam)

  • Twahil Hemed Shakiru

    (University of Dar es Salaam)

  • Fei-Ming Huang

    (Jiangxi University of Finance and Economics)

Abstract

Credit risk remains a pivotal factor influencing the profitability and stability of the banking sector, particularly in the world’s largest economies. This study investigates the impact of credit risk, measured through non-performing loans (NPLs), on bank profitability using a panel quantile regression approach. Analyzing data from 17 largest economies by GDP between 2002 and 2020, the study explores the heterogeneous effects of credit risk across different profitability levels while considering key macroeconomic and financial control variables. The findings reveal a significant negative relationship between NPLs and bank profitability, particularly for institutions in the lower quantiles, indicating that less profitable banks are more vulnerable to credit risk. Additionally, the study highlights the adverse impact of cost inefficiencies and excessive lending on profitability, emphasizing the importance of stringent credit risk management practices. Regulatory capital requirements, while essential for financial stability, may also constrain profitability. Economic growth positively influences bank profitability, whereas inflation shows an insignificant effect. These results underscore the need for proactive risk mitigation strategies, effective cost management, and balanced regulatory policies to enhance banking sector resilience. The study provides valuable insights for policymakers, financial institutions, and regulators striving to foster financial stability and sustainable profitability in global banking.

Suggested Citation

  • Emmanuel Ezekiel Mwanjilinji & Twahil Hemed Shakiru & Fei-Ming Huang, 2025. "The Role of Credit Risk in Shaping the Profitability of the Banking Sector in the World's Largest Economies: Evidence from Panel Quantile Regression," SN Business & Economics, Springer, vol. 5(11), pages 1-30, November.
    • Handle: RePEc:spr:snbeco:v:5:y:2025:i:11:d:10.1007_s43546-025-00964-y
    DOI: 10.1007/s43546-025-00964-y
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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