The impact of Basel II on the banking strategies in the Middle East and North African (MENA) region

Ghanem, Abdeljalil

doi:10.1057/jbr.2016.1

Cited by 11 publications

(7 citation statements)

References 9 publications

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“…For example [ 53 ], find no significant relationship between capital stringency and the likelihood of bank distress in the GCC region. In contrast [ 54 ], finds that the implementation of the Basel II capital regulation has a positive effect on credit growth of banks in Egypt, Jordan, Lebanon, Morocco and Tunisia. [ 30 ] explores the relationship between capital and risk in 57 CBs and 46 IBs in the MENA region.…”

Section: Theoretical Framework and Hypothesesmentioning

confidence: 99%

Competition, capital growth and risk-taking in emerging markets: Policy implications for banking sector stability during COVID-19 pandemic

2021

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This paper investigates how banking competition and capital level impact on the risk-taking behavior of banking institutions in the Middle East and North Africa (MENA) region. The topic is perceived to be of significant importance during the COVID-19 pandemic. We use data for more than 225 banks in 18 countries in the MENA region to test whether increased competition causes banks to hold higher capital ratios. Employing panel data techniques, and distinguishing between Islamic and conventional banks, we show that banks tend to hold higher capital ratios when operating in a more competitive environment. We also provide evidence that banks in the MENA region increase their capitalization levels in response to a higher risk and vice versa. Further, banking concentration (measured by the HH-index) and credit risk have a significant and positive impact on capital ratios of IBs, whereas competition does play a restrictive role in determining the level of their capital. The results hold when controlling for ownership structure, regulatory and institutional environment, bank-specific and macroeconomic characteristics. Our findings inform regulatory authorities concerned with improving the financial stability of banking sector in the MENA region to strengthen their policies in order to force banks to better align with capital requirements and risk during the COVID-19 pandemic.

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Section: Theoretical Framework and Hypothesesmentioning

confidence: 99%

Competition, capital growth and risk-taking in emerging markets: Policy implications for banking sector stability during COVID-19 pandemic

2021

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“…Empirically, Maghyereh and Awartani (2014) used logit regressions and found no significant relationship between capital stringency and the likelihood of bank distress in the GCC region. However, Ghanem (2017) used bank-level data from 1997 to 2013 and found that the implementation of the Basel II capital regulation has a positive effect on credit growth of banks in Egypt, Jordan, Lebanon, Morocco and Tunisia. Bitar et al (2016) used OLS regressions to analyse bank-level data from 1999 to 2013 and found that capital ratios are positively associated with loan loss reserve ratios, bank efficiency and profitability, and thus support the recommendations of the Basel Committee to hold higher capital ratios.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

“…We find that only foreign ownership has an inverse effect on bank risk-taking, and thus support “global advantage hypothesis[2]”. Third, we extend related studies (Ghanem, 2017; Bitar et al , 2016; Maghyereh and Awartani, 2014) and investigate if the Basel II guidelines (e.g. capital regulations, supervisory power and market-oriented disclosures) and activity restrictions discipline bank risk-taking behaviour.…”

Section: Introductionmentioning

confidence: 95%

“…For example, a growing body recent literature (Ghosh, 2017; Srairi, 2013); Hammami and Boubaker, 2015; Lassoued et al , 2016) examined the effects of CG or ownership structure on bank performance in MENA countries, without taking into consideration the effect of bank regulation. A related literature (Ghanem, 2017; Bitar et al , 2016) used bank-level data on capital adequacy ratios, rather than overall indices of capital stringency or other regulations such as supervisory power and market discipline. Maghyereh and Awartani (2014) used an old set of data (2000-2009) to examine the effect of bank regulation on bank distress in the GCC countries, without addressing the effects of the interaction variables.…”

Section: Introductionmentioning

confidence: 99%

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Ownership, regulation and bank risk-taking: evidence from the Middle East and North Africa (MENA) region

Haque

2019

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Purpose This study aims to investigate how ownership structure and bank regulations individually and interactively influence risk-taking behaviour of a bank. Design/methodology/approach This empirical framework is based on dynamic two-step system generalised method of moments estimation technique to analyse an unbalanced panel data set covering 144 conventional banks from 12 Middle East and North Africa (MENA) countries. Findings The estimation results suggest that foreign shareholding has an inverse relationship with bank risk-taking. In addition, official supervisory power is found to have a positive association with bank risk, and this relationship is reinforced for banks with higher ownership concentration. In addition, capital stringency increases bank risk, whereas market discipline has an opposite effect, only in countries with higher activity restrictions. Finally, the interaction between ownership concentration and activity restriction has an inverse association with bank risk-taking. Research limitations/implications Overall, the evidence suggests that the Basel II framework and the regulatory reform initiatives in the post-global financial crisis period do not seem to have reduced bank risk-taking in MENA countries. Originality/value This study contributes to the literature on the effectiveness of regulatory reform based on the three pillars of the Basel II guidance (capital regulations, market-oriented disclosures and official supervisory power), and offers evidence in support of “political/regulatory capture hypothesis” of bank regulation. The results also provide support for “global advantage hypothesis” of bank ownership.

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“…We contribute to the existing empirical literature in several ways. First, prior research examines the impact of Basel capital requirements on the risk-taking behavior of banking institutions in the MENA region (Maghyereh and Awartani, 2014; Ghanem, 2017) and finds CAR to have a positive impact on their risk level. However, the differential impact of capital regulation and competition on Islamic banking institutions remains relatively unexplored.…”

Section: Introductionmentioning

confidence: 99%

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

Mateev

Moudud‐Ul‐Huq

Sahyouni

2021

JIABR

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Purpose This paper aims to investigate the impact of regulation and market competition on the risk-taking Behaviour of financial institutions in the Middle East and North Africa (MENA) region. Design/methodology/approach The empirical framework is based on panel fixed effects/random effects specification. For robustness purpose, this study also uses the generalized method of moments estimation technique. This study tests the hypothesis that regulatory capital requirements have a significant effect on financial stability of Islamic and conventional banks (CBs) in the MENA region. This study also investigates the moderating effect of market power and concentration on the relationship between capital regulation and bank risk. Findings The estimation results support the view that capital adequacy ratio (CAR) has no significant impact on credit risk of Islamic banks (IBs), whereas market competition does play a significant role in shaping the risk behavior of these institutions. This study report opposite results for CBs – an increase in the minimum capital requirements is followed by an increase in a bank’s risk level, which has a negative impact on their financial stability. Furthermore, the results support the notion of a non-linear relationship between banking concentration and bank risk. The findings inform the regulatory authorities concerned with improving the financial stability of banking sector in the MENA region to set their policy differently depending on the level of concentration in the banking market. Research limitations/implications This study contributes to the literature on the effectiveness of regulatory reforms (in this case, capital requirements) and market competition for bank performance and risk-taking. In regard to IBs, capital requirements are less effective in requiring IBs to adjust their risk level according to the Basel III methodology. This study finds that IBs’ risk behavior is strongly associated with market competition, and therefore, the interest rates. Moreover, banks operating in markets with high banking concentration (but not necessarily, low competition), will decrease their credit risk level in response to an increase in the minimum capital requirements. As a result, these banks will be more stable compared to their conventional peers. Thus, regulators and policymakers in the MENA region should restrict the risk-taking behavior of IBs through stringent capital requirements and more intense banking supervision. Practical implications The practical implications of these findings are that the regulatory authorities concerned with improving banking sector stability in the MENA region should proceed differently, depending on the level of banking market concentration. The findings inform regulators and policymakers to set capital requirements at levels that would restrict banks from taking more risk to increase their returns. They are also important for bank managers who should avoid risky strategies in response to increased regulatory pressure (e.g. increase in the minimum required capital level of 8%), as they may lead to an increase in the level of non-performing loans, and therefore, a greater probability of bank default. A future extension of this study will focus on testing the effect of bank risk-taking and market competition on the capitalization levels of banks in the MENA countries. More specifically, this study will investigates if banks raise their capitalization levels during the COVID-19 pandemic. Originality/value The analysis of previous research indicates that there is no unambiguous answer to the question of whether IBs perform differently than CBs under different competitive conditions. To fill this gap, this study examines the influence of capital regulation and market competition (both individually and interactively) on bank risk-taking behavior using a large sample of banking institutions in 18 MENA countries over 14 years (2005–2018). For the first time in this line of research, this study shows that the level of market power is positively associated with the level of a bank’ insolvency risk. In others words, IBs operating in highly competitive markets are more inclined to take a higher risk than their conventional peers. Regarding the IBs credit risk behavior, this study finds that market power has a limited impact on the relationship between CAR and risk level. This means that IBs are still applying in their operations the theoretical models based on the prohibition of interest.

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The impact of Basel II on the banking strategies in the Middle East and North African (MENA) region

Cited by 11 publications

References 9 publications

Competition, capital growth and risk-taking in emerging markets: Policy implications for banking sector stability during COVID-19 pandemic

Competition, capital growth and risk-taking in emerging markets: Policy implications for banking sector stability during COVID-19 pandemic

Ownership, regulation and bank risk-taking: evidence from the Middle East and North Africa (MENA) region

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

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