How do banks’ capital regulation and risk-taking respond to COVID-19? Empirical insights of ownership structure

Syed Moudud-Ul-Huq, Kawsar Ahmed, Mohammad Ashraful Chowdhury, Hafiz M. Sohail, Tanmay Biswas and Faisal Abbas

International Journal of Islamic and Middle Eastern Finance and Management, 2021, vol. 15, issue 2, 406-424

Abstract: Purpose - This study aims to investigate the relationship between capital regulation and risk-taking behavior (financial stability) concerning the impacts of the recent global (COVID-19) crisis and diverse ownership structure. Design/methodology/approach - The analysis uses an unbalanced panel data set from 32 commercial banks of Bangladesh for 2000–2020. The authors use the two-step system generalized method of moments and three-stage least squares to produce the study outcomes. Findings - The robust results reveal that the relationship between capital regulation and risk (financial stability) is negative (positive) and bi-directional. More significantly, COVID-19 makes banks fragile and demands more capital to absorb risk. However, the effect of COVID-19 is heterogeneous when the authors consider ownership structure. Among the diverse ownership styles, Islamic and active shareholding show their controlling wheel on capital regulation and risk-taking aptitude (financial stability) during the global (COVID-19) crisis. In normal economic conditions, private banks and minority active shareholding can be a good determinant for capital regulation and risk (financial stability). On the other hand, state-owned and large banks have been found as less capitalized and highly risky. Originality/value - This study is the pioneer in exploring capital regulation and risk toward the recent global (COVID-19) crisis.

Keywords: COVID-19, Capital regulation, Risk-taking, Financial stability, Ownership structure, Commercial banks, C23; G10; G21; G32 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-07-2020-0372

DOI: 10.1108/IMEFM-07-2020-0372

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