Banking Regulation, Credit Risk, and Financial Stability: Evidence from Emerging Economies

This study examines the role of banking regulation in shaping credit risk and financial stability across 12 emerging and developing economies from 2005 to 2022. Using panel data techniques, including fixed effects, random effects, system GMM, panel quantile regression, and threshold analysis, the study investigates how capital adequacy, regulatory quality, liquidity, and bank concentration influence non-performing loans (NPLs) and bank stability (Z-score). Results reveal that higher capital ratios, effective regulatory oversight, and robust liquidity significantly reduce credit risk and enhance financial stability. Threshold analysis indicates a non-linear effect, with banks exceeding a 10% capital adequacy ratio experiencing a stronger reduction in NPLs. Additionally, macroeconomic factors such as GDP growth, inflation, and interest rates play an important moderating role. These findings underscore the necessity of enforcing minimum capital requirements, strengthening regulatory frameworks, and adopting risk-sensitive supervisory measures to foster resilient banking sectors in emerging economies.