Risk Interactions and Bank Performance in Emerging Markets: Examining the Nexus of Credit Risk, Profitability, and Financial Stability

Abstract

This study investigates the interconnected relationship between credit risk, profitability, and financial stability within the context of emerging market banking systems, using panel data from 10 listed Egyptian commercial banks over the period 2013–2023. Utilizing panel regression models with clustered standard errors to address heteroskedasticity and serial correlation, the analysis evaluates both the direct and mediating effects of credit risk on bank performance. Profitability, proxied by Return on Assets (ROA), is examined as a potential channel through which credit risk influences financial resilience, measured by Z-scores. The findings reveal that while capital adequacy significantly enhances profitability, credit risk does not exert a statistically significant influence on ROA. Furthermore, profitability does not significantly predict financial stability in the Egyptian context, challenging the linear transmission mechanisms proposed in traditional models. However, credit risk demonstrates a marginally significant negative effect on financial stability, reinforcing concerns about the structural vulnerabilities in credit portfolios. These results underscore the heterogeneous nature of bank behavior in emerging economies and highlight the limitations of earnings-based buffers in weak institutional environments. The study contributes to the literature by integrating risk management, income generation, and stability outcomes within a single empirical framework, offering context-specific insights that extend beyond conventional models developed for advanced markets. Practical implications are offered for policymakers and regulators seeking to strengthen provisioning practices and risk-sensitive performance metrics.