Dr. Using Z score to Quantify Saudi Banks’ Systematic Risk

Abstract

The study aimed to quantify the systematic risk for Saudi banks using Z score for the period 2013-2022 as the sample of the study comprised of all 10 Saudi banks registered on the Saudi capital market known as TASI. The current study used Z score model as a proxy for the systematic risk that is the inverse of probability of insolvency as the model relies on published accounting information. Z score model uses equity to total assets as a proxy for the financial solvency, return on assets as a proxy for banks’ performance and the standard deviation of return on assets as a proxy for volatility. The results of the study indicated that Z score for all Saudi banks for the study period recorded 25.1736332, which is better than Z scores recorded for banks in several developed countries such as Austria, Germany, Spain, France, Russian Federation, and Ukraine. In addition, the results of Z score on a yearly basis showed that the best Z score was in 2015 and the lowest Z score was in 2020. The results of the study has made an incremental contribution to the current literature as it provided empirical evidence on the validity of  Z score  as a proxy for the systematic risk in capturing  the impact of  extreme exogenous events  on the degree of stability of Saudi banks. The results will be helpful to several stakeholders including but not limited to the regulator, bank managers and investors as the results showed the best and worst performers in terms of systematic risk.