Does competition lead to financial stability or financial fragility for Islamic and conventional banks? Evidence from the GCC countries

Mohamed Albaity, Ray Saadaoui Mallek, Hussein A. Hassan Al‐Tamimi and Abu Hanifa Md. Noman

International Journal of Finance & Economics, 2021, vol. 26, issue 3, 4706-4722

Abstract: This paper investigates the nexus between stability and competition in the banking sector of the Gulf Cooperation Council. We examined a sample of 75 banks over the period 2006–2016. We found a U‐shaped relationship between bank stability and competition suggesting competition‐stability and competition‐fragility nexus. Banking concentration was found to affect instability negatively, which supported the “too important to be bailed out” view. Furthermore, we found that Islamic banks were less stable compared to conventional banks. We also found that bank size, profitability and capital regulation increase bank stability. In addition, the stock market return and the level of debt‐to‐GDP increase instability while the growth in oil price increase stability. Our findings are relevant to regulators to impose or release restrictions that boost financial stability.

Date: 2021
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