Testing the Non-Linear Relationship between Liquidity Risk and Bank Stability in the MENA Region

Abstract

This paper aims to investigate whether the relationship between liquidity risk and bank stability is non-linear. It uses a sample of 83 MENA banks from 2005 to 2020. Due to several economic, financial, and regulation differences, the whole sample was divided into two sub-samples. The first one is related to Middle East countries and covers 56 banks while the second one is related to North African countries and covers 27 banks. We performed the Panel Smooth Threshold Regression (PSTR) model proposed by González et al. (2005) as an empirical approach. The empirical results indicate that exists a threshold effect in the liquidity risk-bank stability relationship. More specifically, we found that below a certain threshold, the loan to-deposit-ratio does not exert any significant effect on bank stability in the Middle East; while it significantly increases the stability of banks in North African countries. Above, the same threshold, the loan-to-deposit ratio significantly decreases bank stability for the two sub-samples.

Banking Regulation and Financial Soundness Nexus in View of the Crisis: An Islamic Banking Perspective

“…Islamic banks' solid CAR and Tier 1 capital ratios are driven by increased internal capital generation from retained earnings. This boost is associated with heightened income resulting from economic reopening, recovery, and improved profitability (Gabr and ElBannan, 2018;Khemiri, 2022). The GDPG is used as a macroeconomic indicator because it measures economic growth over time.…”