Efficiency and Risk of ASEAN Commercial Banks: Panel Vector Autoregressive Approach

This study investigates the causal relationship between profit efficiency and bank risk in Southeast Asian commercial banks using a Panel Vector Autoregression framework. The banking data is unbalanced panel data collected from BankFocus from 2007 to 2022 from the data of financial institutions in 11 Southeast Asian countries. The author excluded commercial bank data from three countries, including Brunei, East Timor, and Myanmar, due to their lack of financial reports. Therefore, the number of commercial banks obtained is 118 banks from eight countries including Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. Profit efficiency is measured by ROA and ROE, and bank risk is proxied by Z-score. The results reveal a bidirectional causal relationship between profit efficiency and bank risk. Bank risk positively affects ROA at a 10% significance level, while ROA has a negative effect on bank risk at a 1% level. In contrast, bank risk exerts a negative and significant impact on ROE at a 1% level, whereas changes in ROE do not significantly influence bank risk. These findings imply that Vietnamese commercial banks need to maintain a balance between traditional operations and diversification strategies. Simultaneously, evidence of a causal relationship between profitability and risk supports hypotheses of poor management and austere behavior, thereby highlighting the need to strengthen governance capacity, improve operational quality, and implement appropriate development strategies to optimize efficiency and ensure sustainable risk control.