The underlying effect of unsystematic financial risk on banks' financial performance: An analytical study of commercial banks

Abstract

The purpose of this study is to explore the impact of credit risk, liquidity risk, and operational risk on the profitability of banks in Jordan. Using data from conventional banks between 2017 and 2023, the study employs the generalized method of moments (GMM) for coefficient estimation to account for endogenous variables. The findings indicate that both credit and liquidity risks negatively affect bank profitability, with this negative effect evident when the risks are considered individually or together. However, operational risk does not have a significant direct impact on financial performance. This research contributes to the understanding of how financial risks influence bank performance, particularly in developing economies, and provides practical insights for senior management in financial institutions, offering guidance on risk management strategies to mitigate the adverse effects of credit and liquidity risks.