This is the accepted version of the paper.This version of the publication may differ from the final published version. Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large crosscountry variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality. Permanent repository link Cover Letter *Detailed Response to ReviewersWe compare conventional and Islamic banks across 22 countries with both bank types. Abstract: How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.JEL classification: G21; G01; Z12

This is the accepted version of the paper.This version of the publication may differ from the final published version. Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large crosscountry variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality. Permanent repository link Cover Letter *Detailed Response to ReviewersWe compare conventional and Islamic banks across 22 countries with both bank types. Abstract: How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.JEL classification: G21; G01; Z12

The Manipulation of Basel Risk-Weights* In this paper, we examine the relationship between banks' approval for the internal ratings-based (IRB) approaches of Basel II and the ratio of riskweighted over total assets. Analysing a panel of 115 banks from 21 OECD countries that were eventually approved for applying the IRB to their credit portfolio, we find that risk-weight density is lower once regulatory approval is granted. The effect persists when we control for different loan categories, and we provide evidence showing that it cannot be explained by flawed modelling, or improved risk-measurement alone. Consistent with theories of risk-weight manipulation, we find the decline in risk-weights to be particularly prevalent among weakly capitalised banks, when the legal framework for supervision is weak, and in countries where supervisors are overseeing many IRB banks. We conclude that part of the decline in reported riskiness under the IRB results from banks' strategic risk-modelling.JEL Classification: G20, G21 and G28

Using data on the behavior of large settlement banks in the UK and the Sterling Money Markets before and during the sub-prime crisis of 2007-08, we provide evidence of precautionary hoarding of liquidity and its effect on inter-bank borrowing rates. Our evidence consists of three pieces. First, we document that liquidity holdings of the large settlement banks in the UK experienced on average a 30% increase in the period immediately following 9th August, 2007, the widely accepted date of money-market "freeze" during the sub-prime crisis. Second, we show that following this structural break, bank liquidity had a precautionary nature in that it rose on calendar days predicted to have a large amount of fluctuations in payment and settlements activity and more so for banks that made larger losses during the crisis. Third, using the payment and settlements activity as an instrument, we establish a causal effect of bank liquidity on overnight inter-bank rates, in both secured and unsecured markets, an effect that is virtually absent in the period before the crisis. Importantly, precautionary hoardings by some settlement banks raised lending rates for all settlement banks, suggestive of a contagion-style systemic risk operating through inter-bank rates. Finally, variability in overnight inter-bank rates appears to have affected rates and volumes in household as well as corporate lending.JEL: