Competition, regulation, and systemic risk in dual banking systems

Indria Ernaningsih, Houcem Smaoui and Ines Ben Salah

International Review of Economics & Finance, 2024, vol. 93, issue PA, 1087-1103

Abstract: This study investigates the impact of competition and banking regulation on the systemic risk of Islamic Banks (IBs) and Conventional Banks (CBs). Utilizing a random effects panel model with robust errors and an unbalanced panel data set encompassing 80 IBs and 204 CBs from 17 emerging market countries spanning 2000 to 2019, we show that the lack of competition increases systemic risk exposure, which may stem from the interconnection channels and the individual bank risk contributions. Interestingly, this effect is not significantly different between IBs and CBs. Our results also reveal a non-linear relationship between competition and systemic risk. Specifically, greater competition leads to increased systemic stability, but beyond a certain threshold, higher competition exacerbates banks' systemic risk. Additionally, we find that larger banks are more vulnerable to systemic risk, and the lack of competition worsens this vulnerability. We also show that banks with greater market power after the GFC are more exposed to systemic risk.

Keywords: Bank competition; Systemic risk; Islamic banking; Bank regulation (search for similar items in EconPapers)
JEL-codes: C33 G10 G21 G29 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pa:p:1087-1103

DOI: 10.1016/j.iref.2024.03.078

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