Stress testing, credit risk, and bank performance: New evidence from Jordanian commercial banks

This study examines the relationships among stress testing, credit risk, bank capital, and bank profitability in 13 Jordanian commercial banks over 2010–2020. Using a balanced panel and a two-step system GMM estimator, the analysis addresses endogeneity, reverse causality, unobserved heterogeneity, and dynamic persistence in profitability. The results indicate that credit risk has a significant negative effect on profitability, while bank capital has a positive effect. Stress testing is negatively associated with profitability in the short run, consistent with higher compliance costs and more conservative lending, but it strengthens banks’ resilience through improved risk management and capital planning. The study contributes evidence from an emerging banking system by jointly examining stress testing, credit risk, and bank capital in a dynamic framework. The findings suggest that regulators and bank managers should strengthen stress-testing practices, maintain adequate capital buffers, and enhance credit-risk management to support financial resilience and sustainable bank performance.