Determinants of banks’ risk-taking behavior, stability and profitability: evidence from GCC countries

Abstract

Purpose This paper aims to examine the effect of bank-specific, financial structure and macroeconomic factors on the risk-taking behavior, stability and profitability of banks in Gulf Cooperation Council (GCC) economies during 1998–2017. Design/methodology/approach The authors use a two-step system generalized method of moments dynamic model to analyze the data. Findings The results show that non-traditional activities increase the risk and decrease the stability and profitability of banks that are highly capitalized, highly liquid and large. Banks in this group are less engaged in securities investments and their higher degree of loan exposure leads to a decrease in risk and an increase in their stability and profitability. Higher concentration increases the risk and decreases the stability and profitability of banks that are less capitalized, less liquid and small. Banks with a higher share of non-traditional activities are riskier and less stable and less profitable before the financial crisis. The study finds that banks with relatively higher capitalization and high lending growth rates are riskier, profitable and less stable during the crisis. Larger commercial banks are less risky and more stable and profitable than smaller banks before the global financial crisis. Islamic banks performed better in terms of fee income, capitalization, liquidity, asset quality and have higher market concentration than conventional banks. Originality/value The study provides the first comprehensive empirical evidence on the drivers of risk-taking behavior, stability and profitability of the GCC banks. It also investigates the differences across these variables based on the characteristics of financial strength such as capitalization, liquidity and size; before, during and after the financial crisis; and differences between Islamic and conventional banks.

Liquidity risk and bank financial performance: an application of system GMM approach

“…An increase in GDP rate results in an increase in bank performance in SSA. This confirm the result obtained by Saif-Alyousfi and Saha (2021).…”

Risk-Taking Behaviour of Islamic Banks: A Panel Study

“…Size: Large banks benefit from both economies of scale and diversification of its portfolio thus its risk will decrease. The negative relation between size and risk-taking behavior been reported by Alam [6], Mousa and Zaiani [45], Mairafi et al [42], and Saif-Alyousfi and Saha [54] among others. However, larger banks may have higher credit risk because of lower control.…”

“…The Structure-Conduct-Performance paradigm argues that banks operating in concentrated markets have a higher profit due to monopoly rents, which prevent them from taking high risks. Saif-Alyousfi and Saha [54] reported a negative relationship between concentration and risk-taking behavior by banks. On the other hand, the fragility-competition hypothesis assumes that high concentration erodes banks' profit margin and hence charter value which leads banks to increase its risk because banks have less to lose in insolvency [17,34].…”

“…In a more recent study, Saif-Alyousfi and Saha [54] examined the effect of bank-specific, financial structure and macroeconomic factors on the risk-taking behavior, stability, and profitability of banks in GCC countries during 1998-2017 period, data drawn from Bankscope database. The authors used a two-step system generalized method of moments dynamic model to analyze the data, and risk-taking behavior proxied by the standard deviation of ROA from a three-period rolling window.…”

“…However, it been argued that OBS activities increase banks profitability, which allows them to expand their leverage and maximize the return on investment. The study conducted by Saif-Alyousfi and Saha [54], and Mokni et al [44] showed that OBS activities reduce banks risk-taking behavior. Considering that Islamic banks rely on OBS activities to generate revenue as reported by Al-Harbi [8], hence our fifth hypothesis will be as follows:…”