Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Miroslav Mateev ◽  
Syed Moudud-Ul-Huq ◽  
Ahmad Sahyouni
Keyword(s):  
Market Power ◽  
Risk Behavior ◽  
Risk Taking ◽  
Financial Stability ◽  
Market Competition ◽  
Capital Requirements ◽  
Bank Risk ◽  
Risk Level ◽  
Mena Region ◽  
Content Type

Purpose This paper aims to investigate the impact of regulation and market competition on the risk-taking Behaviour of financial institutions in the Middle East and North Africa (MENA) region. Design/methodology/approach The empirical framework is based on panel fixed effects/random effects specification. For robustness purpose, this study also uses the generalized method of moments estimation technique. This study tests the hypothesis that regulatory capital requirements have a significant effect on financial stability of Islamic and conventional banks (CBs) in the MENA region. This study also investigates the moderating effect of market power and concentration on the relationship between capital regulation and bank risk. Findings The estimation results support the view that capital adequacy ratio (CAR) has no significant impact on credit risk of Islamic banks (IBs), whereas market competition does play a significant role in shaping the risk behavior of these institutions. This study report opposite results for CBs – an increase in the minimum capital requirements is followed by an increase in a bank’s risk level, which has a negative impact on their financial stability. Furthermore, the results support the notion of a non-linear relationship between banking concentration and bank risk. The findings inform the regulatory authorities concerned with improving the financial stability of banking sector in the MENA region to set their policy differently depending on the level of concentration in the banking market. Research limitations/implications This study contributes to the literature on the effectiveness of regulatory reforms (in this case, capital requirements) and market competition for bank performance and risk-taking. In regard to IBs, capital requirements are less effective in requiring IBs to adjust their risk level according to the Basel III methodology. This study finds that IBs’ risk behavior is strongly associated with market competition, and therefore, the interest rates. Moreover, banks operating in markets with high banking concentration (but not necessarily, low competition), will decrease their credit risk level in response to an increase in the minimum capital requirements. As a result, these banks will be more stable compared to their conventional peers. Thus, regulators and policymakers in the MENA region should restrict the risk-taking behavior of IBs through stringent capital requirements and more intense banking supervision. Practical implications The practical implications of these findings are that the regulatory authorities concerned with improving banking sector stability in the MENA region should proceed differently, depending on the level of banking market concentration. The findings inform regulators and policymakers to set capital requirements at levels that would restrict banks from taking more risk to increase their returns. They are also important for bank managers who should avoid risky strategies in response to increased regulatory pressure (e.g. increase in the minimum required capital level of 8%), as they may lead to an increase in the level of non-performing loans, and therefore, a greater probability of bank default. A future extension of this study will focus on testing the effect of bank risk-taking and market competition on the capitalization levels of banks in the MENA countries. More specifically, this study will investigates if banks raise their capitalization levels during the COVID-19 pandemic. Originality/value The analysis of previous research indicates that there is no unambiguous answer to the question of whether IBs perform differently than CBs under different competitive conditions. To fill this gap, this study examines the influence of capital regulation and market competition (both individually and interactively) on bank risk-taking behavior using a large sample of banking institutions in 18 MENA countries over 14 years (2005–2018). For the first time in this line of research, this study shows that the level of market power is positively associated with the level of a bank’ insolvency risk. In others words, IBs operating in highly competitive markets are more inclined to take a higher risk than their conventional peers. Regarding the IBs credit risk behavior, this study finds that market power has a limited impact on the relationship between CAR and risk level. This means that IBs are still applying in their operations the theoretical models based on the prohibition of interest.

Impact of general trust on bank risk-taking: the moderating effect of confidence in banks

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Heba Masoud ◽  
Mohamed Albaity
Keyword(s):  
Risk Taking ◽  
Developing Economies ◽  
Negative Relationship ◽  
Developed Countries ◽  
Moderating Effect ◽  
Bank Risk ◽  
World Value Survey ◽  
Mena Region ◽  
Content Type ◽  
General Trust

PurposeThis study examines the effect of general trust (GT) and confidence in banks (CIB) on bank risk-taking. Besides, it explores the moderating role of CIB on the relationship between GT and bank risk-taking.Design/methodology/approachSecondary data was obtained from the World Value Survey, World Bank and BankFocus from 2011 to 2018. Two-step system GMM estimator was used to examine the links between the GT and CIB with bank risk-taking in MENA region.FindingsResults indicated that both GT and CIB negatively influenced bank risk-taking. Moreover, CIB weakened the negative relationship between GT and bank risk-taking. However, the results were different for MENA region as compared to the full sample.Originality/valueThe studies on the link between trust and bank risk-taking are either carried out on an international sample or using a developed economies sample. However, the authors believe that developing economies might exhibit different relationships due to cultural and structural differences present in developed countries. Besides, the authors believe that testing the moderating effect of CIB could shed more light on the differences between developing and developed countries.

scholarly journals When do regulations matter for bank risk-taking? An analysis of the interaction between external regulation and board characteristics

2018 ◽  
Vol 18 (3) ◽  
pp. 440-461 ◽  
Author(s):  
Glauco De Vita ◽  
Yun Luo
Keyword(s):  
Risk Taking ◽  
Gender Diversity ◽  
Capital Requirements ◽  
Market Discipline ◽  
Bank Risk ◽  
Board Independence ◽  
Board Governance ◽  
Board Size ◽  
Content Type ◽  
External Regulation

PurposeAccording to previous international studies, the impact of external regulation on bank risk is ambiguous. The purpose of this paper is to ask the question, “When do regulations matter for bank risk-taking?” by reporting the first empirical investigation of how the relation between bank regulations (capital requirements, official supervisory power and market discipline) and bank risk-taking is moderated by board monitoring characteristics.Design/methodology/approachUsing SYS-GMM, the analysis of the interaction between bank-level boards of directors’ attributes (board size, board independence and board gender diversity) and external regulation is based on a sample of 493 banks operating in 54 countries over 2001-2015, accounting for three measures of bank risk-taking.FindingsRegulations matter for bank risk-taking conditional on board characteristics: board size, board independence and board diversity. With the exception of capital requirements, the market discipline exerted by external private monitoring and greater supervisory power are unable to mitigate the propensity to greater risk-taking by banks resulting from larger board size, higher board independence and greater gender diversity of the board.Originality/valueThe bank risk empirical literature is still silent as to the interaction between board governance and regulation for the purpose of examining banks’ risk-taking. This paper fills this gap, thus making a significant contribution by extending our knowledge of whether and how board governance moderates the relationship between external regulation and bank risk-taking.

Capital Regulation and Market Competition in the MENA Region: Policy Implications for Banking Sector Stability During COVID-19 Pandemic

2021 ◽  
pp. 097215092110644
Author(s):  
Miroslav Mateev ◽  
Syed Moudud-Ul-Huq ◽  
Tarek Nasr
Keyword(s):  
Credit Risk ◽  
Market Power ◽  
Banking Sector ◽  
Market Competition ◽  
Capital Requirements ◽  
Capital Regulation ◽  
Islamic Banks ◽  
Mena Region ◽  
Conventional Banks ◽  
The Relationship

This article investigates the impact of capital requirements and market competition on the stability of financial institutions in the Middle East and North African (MENA) region. We test the hypothesis that capital requirements significantly affect the risk behaviour of both Islamic and conventional banks in the MENA region. We also investigate the moderating effect of market power and concentration on the relationship between capital regulation and bank risk. We find that capital ratio has a strong positive impact on conventional banks’ credit risk, whereas this effect is insignificant in the sample of Islamic banks. Our analysis indicates that, for the conventional banking sector, the increase in the capitalization level is negatively linked to bank credit risk only when banks’ level of market power is high. Regarding the Islamic banks’ behaviour, we find that the relationship between capital and credit risk is weakly moderated by banking competition. This means that Islamic banks are less sensitive to the market’s competitive conditions in the MENA countries, as they still apply their theoretical models, based on prohibition of interest. Our findings inform regulatory authorities concerned with improving the banking sector’s financial stability in the MENA region to strengthen their policies and force banks to better align with regulatory capital requirements during the COVID-19 pandemic.

Market power and stability of financial institutions: evidence from the Italian banking sector

2019 ◽  
Vol 28 (2) ◽  
pp. 235-265 ◽  
Author(s):  
Cristian Barra ◽  
Roberto Zotti
Keyword(s):  
Labor Market ◽  
Market Power ◽  
Financial Institutions ◽  
Risk Taking ◽  
Financial Stability ◽  
Stochastic Frontier ◽  
Content Type ◽  
Cooperative Banks ◽  
Market Areas ◽  
The Relationship

Purpose This paper aims to explore the relationship between bank market power and stability of financial institutions in Italy between 2001 and 2012. The authors first test the existence of a U-shaped relationship between market power and financial stability. Second, they regress the market share indicator on bank risk-taking to underline whether financial stability is affected by increasing or decreasing the market power of banks. Third, they explore whether this relationship is affected by the size, level of capitalization and credit insolvency of banks. Design/methodology/approach Relying on highly territorially disaggregated data at labor market areas level, the authors estimate the impact of bank market power and other explanatory variables on a proxy of risk taking behavior such as the banking “stability inefficiency” derived simultaneously from the estimation of a stability stochastic frontier. Bank market power is taken into account through an individual measure based on loans. Financial stability is calculated through the Z-score. The authors use, as risk-taking measure, the stability inefficiency whose estimation approach is the stochastic frontier analysis. Findings The empirical evidence shows that the inefficiency of financial stability is found to be U-shaped related with respect to the measure of market power. Bank size is an essential factor in explaining the relationship between bank market power and risk-taking. Cooperative banks have fewer incentives to gain market power to better perform in term of risks. The reform of the cooperative banks that took recently place in Italy is not supported by the data. Originality/value The relationship between bank market power and financial stability has been analyzed using a rich sample of cooperative, commercial and popular banks in Italy over the 2001-2012 period. The authors rely on labor market areas being sub-regional geographical areas where the bulk of the labor force lives and works. The paper investigates the market power-stability link considering both cooperative and non-cooperative banks. Indeed, specific attention has been paid on cooperative banks because of their mission in favor of the local community as only few studies, to the best of the authors’ knowledge, examine cooperative banking.

scholarly journals Competition, capital growth and risk-taking in emerging markets: Policy implications for banking sector stability during COVID-19 pandemic

PLoS ONE ◽  
2021 ◽  
Vol 16 (6) ◽  
pp. e0253803
Author(s):  
Miroslav Mateev ◽  
Muhammad Usman Tariq ◽  
Ahmad Sahyouni
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
Banking Sector ◽  
Institutional Environment ◽  
Positive Impact ◽  
Capital Requirements ◽  
Policy Implications ◽  
Mena Region ◽  
Banking Competition ◽  
Capital Ratios

This paper investigates how banking competition and capital level impact on the risk-taking behavior of banking institutions in the Middle East and North Africa (MENA) region. The topic is perceived to be of significant importance during the COVID-19 pandemic. We use data for more than 225 banks in 18 countries in the MENA region to test whether increased competition causes banks to hold higher capital ratios. Employing panel data techniques, and distinguishing between Islamic and conventional banks, we show that banks tend to hold higher capital ratios when operating in a more competitive environment. We also provide evidence that banks in the MENA region increase their capitalization levels in response to a higher risk and vice versa. Further, banking concentration (measured by the HH-index) and credit risk have a significant and positive impact on capital ratios of IBs, whereas competition does play a restrictive role in determining the level of their capital. The results hold when controlling for ownership structure, regulatory and institutional environment, bank-specific and macroeconomic characteristics. Our findings inform regulatory authorities concerned with improving the financial stability of banking sector in the MENA region to strengthen their policies in order to force banks to better align with capital requirements and risk during the COVID-19 pandemic.

Capital regulatory pressure, charter value and bank risk-taking: empirical evidence for China

2018 ◽  
Vol 26 (1) ◽  
pp. 170-186 ◽  
Author(s):  
Jinyi Zhang ◽  
Hai Jiang
Keyword(s):  
Risk Taking ◽  
Capital Requirements ◽  
Dynamic Panel Data ◽  
Bank Risk ◽  
Market Force ◽  
Regulatory Regime ◽  
Content Type ◽  
Regulatory Pressure ◽  
The Impact ◽  
Charter Value

Purpose The purpose of this paper is to identify the effect of induced capital regulatory pressure on banks’ charter value and risk-taking, and the influence of bank’s charter value on its risk-taking under such a capital regulatory pressure. Design/methodology/approach The authors use two different estimations to check the robustness of the results. First, they apply a two-stage least squares mode to estimate the impact of capital requirements and bank charter value on bank risk-taking, with the influence of capital regulatory and market-force variables on bank charter value. Second, to reduce the problem of unobserved heterogeneity, the authors use dynamic panel data techniques as a check for robustness. Findings The empirical results show that higher capital requirements pressure brings about a lower charter value for banks, which in turn increases their risk-taking. The issue of banks’ risk-taking is also affected by their size: large banks seem to be more stable than their smaller counterparts. Research limitations/implications The authors’ findings suggest that regulatory pressure has had the desired impact on insolvency risk for Chinese banks due to the expected penalty triggered by a breach of capital requirements. Practical implications It is the first paper that investigates the impact of capital regulatory pressure on risk-taking of the Chinese banking system, which sheds light on concerns about regulatory monitoring of bank risk and capital regulatory framework. Social implications This paper measures the impact of capital regulation on Chinese bank charter value and risk-taking and offers some support for the implementation of Basel III in China. Originality/value The authors have constructed different measures of regulatory pressure to investigate the influence of new capital regulatory regime on banks’ behavior. Most importantly, the exogenous changes of banks’ capital ratio induced by capital regulatory pressure during the past decade that provides a unique opportunity to directly analyze the impact of capital regulatory pressure on bank charter value and risk-taking.

scholarly journals Competition and Financial Stability in the European Listed Banks

SAGE Open ◽  
2021 ◽  
Vol 11 (3) ◽  
pp. 215824402110326
Author(s):  
Maria Celia López-Penabad ◽  
Ana Iglesias-Casal ◽  
José Fernando Silva Neto
Keyword(s):  
Market Power ◽  
Risk Taking ◽  
Financial Stability ◽  
Banking System ◽  
Political Community ◽  
Bank Risk ◽  
Bank Competition ◽  
Banking Competition ◽  
The Impact ◽  
The Relationship

The analysis of the relationship between bank competition and financial stability remains a controversial issue and widely discussed in the academic and political community. Using a sample of 117 listed banks in 16 European countries for the years 2011 to 2018, the article explores the impact of market power, measured by the Lerner index, on the bank stability, measured by distance-to-default and Z score. Our results show that for the overall sample, higher market power in banking decreases the risky behavior of banks, confirming the “competition-fragility” view. We do not find any support for a U-shaped relationship between competition and bank risk-taking. However, our findings differ from previous studies pointing out that the relationship between bank competition and risk-taking is differentiated depending on whether the bank is based in a country with a more stable banking system or a less stable one. In countries with a less financially stable banking system, increased competition leads to increased bank risk-taking. In countries with a more stable banking system, market power seems not to influence banks’ financial stability. Public policies must guarantee banking competition but limiting excessive bank risk-taking, especially in countries with less financially sound banking systems. The consolidation of European banking can be a key element for achieving these policies.

Shareholder risk-taking incentives in the presence of contingent capital

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mahmoud Fatouh ◽  
Ayowande A. McCunn
Keyword(s):  
Risk Taking ◽  
Banking System ◽  
Capital Requirements ◽  
Content Type ◽  
Basic Model ◽  
Conversion Rates ◽  
A Minor ◽  
The Impact ◽  
Practical Implications

Purpose This paper aims to present a model of shareholders’ willingness to exert effort to reduce the likelihood of bank distress and the implications of the presence of contingent convertible (CoCo) bonds in the liabilities structure of a bank. Design/methodology/approach This study presents a basic model about the moral hazard surrounding shareholders willingness to exert effort that increases the likelihood of a bank’s success. This study uses a one-shot game and so do not capture the effects of repeated interactions. Findings Consistent with the existing literature, this study shows that the direction of the wealth transfer at the conversion of CoCo bonds determines their impact on shareholder risk-taking incentives. This study also finds that “anytime” CoCos (CoCo bonds trigger-able anytime at the discretion of managers) have a minor advantage over regular CoCo bonds, and that quality of capital requirements can reduce the risk-taking incentives of shareholders. Practical implications This study argues that shareholders can also use manager-specific CoCo bonds to reduce the riskiness of the bank activities. The issuance of such bonds can increase the resilience of individual banks and the whole banking system. Regulators can use restrictions on conversion rates and/or requirements on the quality of capital to address the impact of CoCo bonds issuance on risk-taking incentives. Originality/value To model the risk-taking incentives, authors generally modify the asset processes to introduce components that reflect asymmetric information between CoCo holders and shareholders and/or managers. This paper follows a simpler method similar to that of Holmström and Tirole (1998).

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