Bank-Specific Risks and Performance of Universal Banks in Ghana.

Abstract

The respective impact of the factors that drive bank profitability has been a great source of debate within academia and the banking industry. The objective of this empirical work is to fill the knowledge gap by assessing the impact of selected bank-specific risks on financial performance within the local context of a developing country. The study examined into details the trends in bank-specific risks and examines the effects of these idiosyncratic factors on bank performance in Ghana. Factors investigated as part of this study were categorized into Risk and Non-risk factors. The study focused on three bank-specific risks; Credit, Liquidity and Operational exposures. To probe the hypothesized adverse effects of bank-specific risks, a holistic analysis was performed using a panel dataset of sixteen (16) universal banks in Ghana with secondary financial data collected for a ten-year period (2009 – 2018). A random effects model was estimated with further analysis conducted using summary statistics and a correlation matrix. The findings demonstrate that operational risk, bank size and capitalization significantly influence the financial performance of banks. Directionally, liquidity risk has a positive effect on performance as well as a strong, positive association with credit exposures of a bank. Practical implications of the findings include the formulation of strategies to jointly mitigate credit and liquidity risk and implementation of robust event reporting systems to manage operational risks by banks.