Global banking stability in the shadow of Covid-19 outbreak

Abstract

The ongoing Covid-19 pandemic has been exerting negative effects on several economies in 2020. Therefore, it is of paramount importance to examine the impact of this pandemic on the global banking stability and to assess any potential recovery signals. This study is timely, in that we consider 1090 banks from 116 countries for quarterly periods across 2019–20. The results provide strong empirical evidence that, in the global banking sector, the Covid-19 outbreak has had detrimental impacts on financial performance across various indicators of financial performance (i.e., accounting-based and market-based performance measures) and financial stability (i.e., high-risk indicators including default risk, liquidity risk and asset risk). These results are consistently observed for various regions, countries (US, China and others), and different bank-level characterises, and across income-generation levels among countries. We also find differential effects of the pandemic on alternative banking systems (i.e., conventional and Islamic). Moreover, our trend analysis, based on bank average performance and financial stability over quarterly periods, identifies a signal of recovery for bank stability during the second quarter of 2020. The findings presented in this study offer important financial observations and policy implications to many stakeholders engaging with global banking.