The Impact of Risk Management and Economic Stability on the Financial Performance of Algerian Banks : Evidence from Economic and Bank Specific Variables Using VAR Model and Panel Data Analysis

Abstract

This research aims to investigate the relationship between risk management, economic stability and the financial performance of Algerian banks. Therefore, we used a sample of eighteen (18) Algerian banks, during the period 2010-2019. During the study, we tried to detect the influence of several banking risk ratios and economic variables on the banking profitability in Algeria. To this end, we applied two econometric models, starting with a VAR model to identify the different variables that affect the Algerian economic stability, using a monthly data from December 2010 to March 2019. Than a Panel data analysis was applied composed of 180 observations. The results showed that banking risk management and the used economic evidence certainly influence the financial performance of Algerian banks, however, the impact level is dissimilar from variable to another. The study also revealed differences between state-owned banks and private banks. Moreover, the research proved that the economic stability in Algeria is defined by the variation of the following financial and economic variables: the Monetary Market Rate (MMR), the price of Brent-oil, the foreign exchange rate (USD/DZD), and the foreign exchange reserves. This work permitted us to identify the nature (negative or positive) of the influence of risk management, economic evidence and bank specific variables on the financial performance of the Algerian banking system.