The Impact of Competition and Risk Exposure on Profitability of the Romanian Banking System During the COVID-19 Pandemic

Abstract

In the context of the economic uncertainty generated at the national level and caused not only by the COVID-19 pandemic, for a healthy evolution of business relations in the competitive environment, for resilience and survival in this context of the pandemic and efforts to counteract possible financial losses, optimal risk management plays a key role in the banking system to avoid excessive exposure with a negative impact on financial performance. The present research aimed to provide an analysis of the potential relationship between the competition presented on the example of the Romanian banking market (before the onset of the COVID-19 pandemic and after its start), risk management in terms of risk-weighted assets (credit risk, market risk and operational risk), on one hand, and the profitability of the banking system measured by the ROA (return on assets) indicator, on the other. In order to test the formulated hypotheses, the authors used a predominantly quantitative research methodology based on a statistically deductive analysis with a series of testing objectives and potential cause-effect links. The results of this study indicate, before the onset of the COVID-19 pandemic, the existence of a significant intensity correlation between the banks’ exposure to the total risk (RWA) (risk-weighted assets) and the market share (as dependent variables) and the banking performance indicator (ROA) (as an independent variable) and, after the onset of the COVID 19 pandemic, banks’ exposure to the credit risk, together with the position on the banking market.