The macro environment and financial stability in the banking industry

Abstract

This study has been focused on the significance of financial stability and macro environmental understanding. The aim was to assess the degree of effect that macro environmental factors place upon financial stability, taking the local banking industry as a central concern. The approach taken for this study dealt with both qualitative and quantitative research methods. Qualitative analysis was carried out upon perceptions obtained through local banks’ responses. Discussions developed during the scheduled interview meetings were focused on the importance of macro environmental factors and financial stability, and their relevance, if any, upon each other. Following the macro-economic significance to financial stability as derived from the first part of this study, the second part evaluates such significance on a quantitative scale. A regression model was developed, using financial soundness and other economic indicators as those referred by local banks, as well as some of the indicators used by Isabel W.T. Choy in her study ‘The Effect of Macroeconomic Shocks on Financial Stability in Macao’. In line with Choy’s study, results highlight the significant correlated relationship that the local economy and the local banking industry place on each other. This concept has been put into focus through the resulting highly significant GDP growth rates with respect to the Non- Performing Loans Ratio - the latter used as a key representation of banking sector health. Hence, this study provides evidence that banks are also challenged by factors beyond their reach and control. Therefore banks should not only place extensive focus on activities to maintain adequate profitability levels, but should also regularly assess the risks that the industry itself as well as the external economy promotes to their financial state. The first chapter provides for a short introduction about the banking and finance industry as well as the objective behind this study, followed by literature views upon this respect in the second chapter. The third chapter than provides for an explanation of the methods used to carry out this study, followed by detailed analysis of the results obtained in the 4th chapter. This study closes off with concluding remarks and other recommendations based on the results obtained.