Abstract :
This study provides empirical evidence for the theory of bank s insolvency risk using four lending structure models as in Aisyah et al. (2009). Revisiting similar issue, we conduct a sensitivity analysis to explore whether the previous findings are susceptible towards different time frame and the inclusion of macroeconomic and profitability variables. Consistent to previous findings, we find that insolvency risk is driven by real estate lending and lending concentration even though the magnitudes of the relationship change insignificantly. Surprisingly, the stability of lending structure in the short run shows a contradicting sign of direction. By controlling the macroeconomic and profitability variables, we find that a stable lending structure in the short-run helps to lessen the insolvency risk exposure because as banks maintain their lending portfolio within a one-year period; they can better monitor and manage risk, especially when they are at a transitions of the economic cycle and financial landscape. In summary, real estate and concentrated lending increases bank s insolvency risk, but the impact could be softened by a stable lending structure in the short-run. Our results support the interpretation that the increasing property prices can jeopardize the banking institutions in Malaysia. Thus, the authorities should take immediate action to impede the current amplifying real estate price bubbles while at the same time reinforce the risk management framework for the banking sector concerning real estate lending.
