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2021 ; 1
(1
): 19
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COVID-19 implications for banks: evidence from an emerging economy
#MMPMID34778814
Barua B
; Barua S
SN Bus Econ
2021[]; 1
(1
): 19
PMID34778814
show ga
The COVID-19 pandemic is damaging economies across the world, including financial
markets and institutions in all possible dimensions. For banks in particular, the
pandemic generates multifaceted crises, mostly through increases in default
rates. This is likely to be worse in developing economies with poor financial
market architecture. This paper utilizes Bangladesh as a case study of an
emerging economy and examines the possible impacts of the pandemic on the
country's banking sector. Bangladesh's banking sector already has a high level of
non-performing loans (NPLs) and the pandemic is likely to worsen the situation.
Using a state-designed stress testing model, the paper estimates the impacts of
the COVID-19 pandemic on three particular dimensions-firm value, capital
adequacy, and interest income-under different NPL shock scenarios. Findings
suggest that all banks are likely to see a fall in risk-weighted asset values,
capital adequacy ratios, and interest income at the individual bank and sectoral
levels. However, estimates show that larger banks are relatively more vulnerable.
The decline in all three dimensions will increase disproportionately if NPL
shocks become larger. Findings further show that a 10% NPL shock could force
capital adequacy of all banks to go below the minimum BASEL-III requirement,
while a shock of 13% or more could turn it to zero or negative at the sectoral
level. Findings call for immediate and innovative policy measures to prevent a
large-scale and contagious banking crisis in Bangladesh. The paper offers lessons
for other developing and emerging economies similar to Bangladesh.