AUTHOR: Enkhtuvshin Dalantaibaatar, Gunbileg Ganbayar, Gerelt-Od Uvgunkhuu
PUBLISHED IN: Volume 6 Issue 1
KEYWORDS: Commercial Banks, Bank Stability, System GMM, Mongolia
ABSTRACT
This study examines the internal and macroeconomic determinants of bank stability in Mongolia using a dynamic panel data framework. Focusing on ten commercial banks over the period 2014–2024, the analysis employs a system Generalized Method of Moments (GMM) estimator to address endogeneity, unobserved bank-specific heterogeneity, and dynamic adjustment effects. Bank stability is measured using the Z-score, while the explanatory variables include key bank-specific characteristics, such as deposit structure, liquidity, lending activity, credit risk, and efficiency, alongside macroeconomic indicators of economic growth and inflation. The system GMM results indicate limited persistence in bank stability, suggesting that stability adjusts rapidly to contemporaneous bank-specific fundamentals and macroeconomic conditions rather than being strongly path dependent. Among internal factors, the deposit ratio and non-performing loan ratio exert significant negative effects on bank stability, underscoring the destabilizing role of excessive reliance on deposits and credit risk. In contrast, higher lending activity is found to enhance stability, reflecting improved income generation when credit risk is effectively managed. Operational inefficiency is associated with lower stability, underscoring the importance of sound cost and revenue management. Macroeconomic conditions also play a significant role. GDP growth is negatively associated with bank stability, indicating potential risk-taking and credit expansion during economic booms. In contrast, inflation is positively associated, suggesting that moderate inflation may support bank earnings and balance-sheet strength in the short run. Standard diagnostic tests confirm the validity of the system GMM specification and the robustness of the estimated results.
DOI: https://doi.org/10.65194/IJBI-2026-1004
