Financial Risk Indicators on the Performance and Stability of Banks: Evidence from Jordanian Banks (2018–2024)

This study investigates the key determinants of bank stability and profitability in commercial and Islamic banks listed on the Amman Stock Exchange (ASE) in Jordan, with a focus on credit risk and capital adequacy during the period 2018–2024. Using panel data from 15 banks, the study applies fixed effects regression models with clustered standard errors. Liquidity is proxied by the loan-to-deposit ratio (LDR), credit risk by the loans loss provisions-to-total loans ratio, and capital strength by the equity-to-assets ratio, alongside a COVID-19 dummy and an interaction term between liquidity and credit risk. Financial performance and stability are measured using return on assets (ROA), return on equity (ROE), and the logarithmic Z-score. The findings indicate that credit risk has a significant negative effect on both bank performance and financial stability, whereas capital adequacy exerts a positive and significant effect. The COVID-19 pandemic negatively affected financial performance and stability, while liquidity (LDR) shows no significant direct effect. The interaction between liquidity and credit risk was statistically insignificant across all estimated models, suggesting that credit risk remains the dominant determinant regardless of liquidity conditions. The study highlights the importance of effective credit risk management and strong capital buffers in enhancing bank resilience. It contributes to the literature by providing recent evidence from the Jordanian banking sector and by incorporating multiple performance measures, a pandemic shock variable, and risk interaction effects to better understand bank stability within a unified empirical framework for an emerging banking market.