Credit risk expectations, operational resilience and macroeconomic exposure: an outlook from US commercial banks

Abstract

Purpose The study evaluates the impact of operational resilience and dynamics in the macroeconomic environment on credit risk expectations among US commercial banks. Design/methodology/approach The study utilized data from relevant sources from 2012 to 2022, for the 50 main continental US States in the inquiry. The empirical estimates examining the core objectives of the study were performed using the panel-corrected standard error (PCSE) estimation technique and the dynamic panel threshold analytical methodology augmented by the system GMM model. Findings The results suggest that bank internal resilience and net interest margins may foster credit risk expectations. Additionally, reviewed empirical estimates show that volatile inflationary conditions and macroeconomic uncertainty have a positive impact or heighten credit risk expectations. A percentage growth in GDP, on the other hand, is found to have a negative effect or help minimize credit risk expectations. Auxiliary empirical estimates further verified a significant nonperforming asset-to-total assets threshold of 0.617, suggesting a nonlinear nexus between modeled explanatory variables and credit risk expectations. Practical implications The findings highlight the importance of economic growth (GDP growth) in credit risk management and the need for policies that bolster the productive sectors of the economy. For strategists in the banking sector, the reviewed findings stress the importance of strategies that make banks less susceptible to volatile inflationary conditions and macroeconomic uncertainty due to their adverse impact on credit risk expectations. Strategists in the banking industry may take a cue from the fact that managing credit risk expectations calls for a better understanding of prevailing macroeconomic dynamics. Originality/value Relative to most reviewed studies on credit risk, this study presents an alternative perspective on credit risk discourse. The approach adopted in this study deviates from the norm and focuses on credit risk expectations, rather than credit risk as often reviewed in existing literature. In other words, this study focuses on the prospect or likelihood of credit risk, and not the condition itself.