Drivers of Bank Risk, Solvency, and Profitability in the Armenian Banking System

The aim of this study is to examine the effects of bank-specific, regulatory and macroeconomic determinants on bank risk, profitability and solvency in the Armenian banking sector. To account for these, we apply a GMM technique to a panel of 22 Armenian banks covering the 2003–2014 period. The estimation results show that abnormal loan growth leads to a decrease in the regulatory capital ratio, to an increase in loan loss provision and to a reduction of relative interest income. Regarding GDP we observe a negative influence on banks´ solvency, profitability and risk. When focusing on regulatory variables we identify a negative relation between the implementation of the Basel II Accord and the regulatory capital ratio. Moreover, we find that banks belonging to international financial groups have better credit risk management than domestic banks. All in all, our results suggest, that excessive loan growth, economic environment and ownership structure affect core aspects of banks’ operations.