Capital regulation, competition and risk-taking: Policy implications for banking sector stability in the MENA region

Miroslav Mateev, Syed Moudud-Ul-Huq, Ahmad Sahyouni and Muhammad Usman Tariq

Research in International Business and Finance, 2022, vol. 60, issue C

Abstract: This paper investigates how capital requirements and bank competition affect banks' financial soundness in the Middle East and North Africa (MENA) region. We test the hypothesis that regulatory capital positively impacts the risk-taking behavior of Islamic and conventional banks in the MENA region. The analysis indicates that the capital adequacy ratio has no significant influence on the credit risk of Islamic banks; however, market competition does play a significant role in shaping the risk behavior of these institutions. We report the opposite result for conventional banks – an increase in the minimum capital requirements is associated with an increase in their risk level. We also find that Islamic and conventional banks experience a non-linear relationship between market concentration and bank risk. Our findings inform regulatory authorities concerned with improving banking sector’s stability in the MENA region to strengthen their policies to force banks to better align with capital requirements which is highly important during the COVID-19 pandemic.

Keywords: Market competition; Regulation; Credit and insolvency risk; Financial stability (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 G38 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:60:y:2022:i:c:s0275531921002002

DOI: 10.1016/j.ribaf.2021.101579

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