The Impact of Variable Interactions on Bank Fragility

What is it about?

This paper aimed at studying the development of bank fragility in Lebanon over the period 1990-2013. Using the Z-score measure, we find significant improvement of bank stability over the studied period. We also detect the impact of several internal and external factors on Z-score and find that bank size, liquidity, and market concentration boost bank stability. Conversely, net interest margin, deposit growth, and inefficiency increase insolvency risk. We extend our analysis and test the impact of variable interactions on Z-score and show that the common impact of many variables totally differs from the impact of those variables separately. This finding stresses the importance of looking beyond the influence of each factor individually and considering the interaction among variables on bank fragility.

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