Prague Economic Papers 2018, 27(5):573-587 | DOI: 10.18267/j.pep.666

Have More Profitable Banks a More or a Less Risky Lending Policy? Empirical Evidence from CEE Countries

Blanka Škrabic Peric
Faculty of Economics, University of Split, Croatia (bskrabic@efst.hr)

This paper investigates the short and long-run relationship between credit risk and two bank profitability indicators ROA and ROE in Central and Eastern European countries during the period from 2000 to 2010. Results from previous research mostly confirm the negative relationship between profitability and credit risk by considering the current or one year lagged value of profitability. Certain crisis indicates that more profitable banks before the crisis became more risky during the time of crisis. These results motivate us to upgrade the model of credit risk by including earlier values of profitability. Results indicate that two or three years are necessary for growth of profitability to increase credit risk. However, the long-run relationship between foreign banks' profitability and credit risk is positive, for both indicators. For the domestic bank, the long-run effect of ROA on credit risk is positive, while for ROE this relationship is negative.

Keywords: credit risk, profitability, foreign bank, CEE countries
JEL classification: C23, G21, G32, P34

Accepted: February 13, 2018; Published: October 1, 2018  Show citation

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Škrabic Peric, B. (2018). Have More Profitable Banks a More or a Less Risky Lending Policy? Empirical Evidence from CEE Countries. Prague Economic Papers, 27(5), 573-587. doi: 10.18267/j.pep.666
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