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Capital regulation, competition and risk-taking: Policy implications for banking sector stability in the MENA region

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  • Mateev, Miroslav
  • Moudud-Ul-Huq, Syed
  • Sahyouni, Ahmad
  • Tariq, Muhammad Usman

Abstract

This paper investigates how capital requirements and bank competition affect banks' financial soundness in the Middle East and North Africa (MENA) region. We test the hypothesis that regulatory capital positively impacts the risk-taking behavior of Islamic and conventional banks in the MENA region. The analysis indicates that the capital adequacy ratio has no significant influence on the credit risk of Islamic banks; however, market competition does play a significant role in shaping the risk behavior of these institutions. We report the opposite result for conventional banks – an increase in the minimum capital requirements is associated with an increase in their risk level. We also find that Islamic and conventional banks experience a non-linear relationship between market concentration and bank risk. Our findings inform regulatory authorities concerned with improving banking sector’s stability in the MENA region to strengthen their policies to force banks to better align with capital requirements which is highly important during the COVID-19 pandemic.

Suggested Citation

  • Mateev, Miroslav & Moudud-Ul-Huq, Syed & Sahyouni, Ahmad & Tariq, Muhammad Usman, 2022. "Capital regulation, competition and risk-taking: Policy implications for banking sector stability in the MENA region," Research in International Business and Finance, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:riibaf:v:60:y:2022:i:c:s0275531921002002
    DOI: 10.1016/j.ribaf.2021.101579
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    More about this item

    Keywords

    Market competition; Regulation; Credit and insolvency risk; Financial stability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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