Exploring risk resistant banking strategies: implications for sustainable practices

Abstract The subprime mortgage crisis has sharply traumatized the world financial system and subsequently put a question on the resilience. Even the commercial banks from a strong economy like the USA have experienced abrupt collapse. Such a scenario has induced deep concern among the stakeholders of the banking sector globally. Almost all the recent bank failure cases are centered on incapacitated risk governance mechanisms. Credit risk, liquidity risk and capital risks are the fundamental contributors of a risk management framework as per the recent empirical evidence and they are very much intertwined. We have explored the expert justification of the magnitude of these pivotal risks through an open-ended interview approach in order to formulate a sophisticated risk governance framework. We have also explored the determinants of these key risks using both the difference GMM and the System GMM approach on panel data from 2005 to 2020 of listed Bangladeshi banks. We have found that capital adequacy is significantly affected by asset turnover and cash in a positive manner, whereas management efficiency and non-performing loan (NPL) ratio negatively affect it. Asset turnover, experience and cost-to-income ratio negatively affect the credit risk, whereas NPL ratio and liquidity risk ratio influence it in a significant positive manner. Liquidity risk is significantly affected mostly by asset turnover, return on assets, cost-to-income ratio and credit risk. Following the empirical assessment, we have suggested a few policies for the regulatory authority with a view to making the banking practice more risk-resilient and sustainable.