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Basel Compliance and Financial Stability: Evidence from Islamic Banks

Mohammad Bitar, Sami Ben Naceur, Rym Ayadi and Thomas Walker

No 2017/161, IMF Working Papers from International Monetary Fund

Abstract: The paper provides robust evidence that compliance with Basel Core Principles (BCPs) has a strong positive effect on the Z-score of conventional banks, albeit less pronounced on the Zscore of Islamic banks. Using a sample of banks operating in 19 developing countries, the results appear to be driven by capital ratios, a component of Z-score for the two types of banks. Even though smaller on Islamic banks, individual chapters of BCPs also suggest a positive effect on the stability of conventional banks. The findings support the effective role of BCP standards in improving bank stability, whose important implications led to the Islamic Financial Services Board (IFSB) publication of new recommendations in 2015 to bring BCP standards in line with the Core Principles for Islamic Finance Regulation (CPIFRs) standards. Our findings suggest that because Islamic banks are benchmarked closely to BCPs, the implementation of CPFIRs should also positively affect their stability.

Keywords: WP; BCP compliance; Islamic bank; bank stability; compliance index; BCP index; BCPs; CPIFRs; Stability; Islamic banks; conventional bank; bank type; Basel Core Principles; Bank soundness; Islamic banking; Bank regulation; Bank supervision; Global (search for similar items in EconPapers)
Pages: 40
Date: 2017-07-18
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Handle: RePEc:imf:imfwpa:2017/161