Analysis of Banking Soundness in Terms of Country Effect: A Worldwide Evidence Using the Bankers Top 1000 Banks’ Database

This paper investigates banking soundness indicators using the Bankers Top 1000 banks’ database, which includes 638 high-income countries, 233 upper-middle-income countries, 111 lower-middle-income countries and the remaining two low-income countries. This was conducted using data from 984 banks from 2002 to 2021, where banking soundness was measured mainly using the CAMELS approach. The income-performance relationship is still a controversial topic. According to the traditional view, banks of high-income countries may enhance profits and reduce financial fragility by maintaining higher levels of capital that protect them from external economic and liquidity shocks. On the contrary, the proponents of the other view argue that rich banks are more likely to take on risky investments with the knowledge of being protected, resulting in a solid economic position. Investments may be inefficiently managed due to moral hazard problems, lowering the banking soundness indicators. Using panel data analysis according to the GMM model, the results have not supported any significant effects of income level on banks’ capital adequacy and liquidity. Besides, findings indicate significant positive effects on asset quality and management, which means that banks in high-income countries seem to have high non-performing loans and staff cost ratios. In addition, these countries seem to have lower profitability and sensitivity to risk indicators. Robustness checks have been conducted and results have been supported.