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The Influence Of Basel Iii On Islamic Bank Risk

Author

Listed:
  • Xiaoling Ding

    (International Islamic University Malaysia, Malaysia)

  • Razali Haron

    (International Islamic University Malaysia, Malaysia)

  • Aznan Hasan

    (International Islamic University Malaysia, Malaysia)

Abstract

This paper investigates the impact of bank regulatory capital on Islamic bank risk using bank-level data from 29 countries covering the period from 2004 to 2020. Applying the generalized method of moments technique on dynamic panels, we discover that on average Islamic bank regulatory capital ratios exceed the level required by Basel III. The findings provide evidence in support of the moral hazard hypothesis; that is, there is a negative relationship between capital and risk. They indicate that Islamic banks are better protected against risk when they fulfill Basel III and IFSB regulatory capital requirements. According to our findings, authorities that aim to improve the financial stability of the banking industry should reinforce their policies and oblige banks to adhere to regulatory capital requirements during crises such as Covid-19. Finally, we observe that different risk indicators have diverse correlations with regulatory capital, and that the findings are robust across a variety of estimation methodologies.

Suggested Citation

  • Xiaoling Ding & Razali Haron & Aznan Hasan, 2023. "The Influence Of Basel Iii On Islamic Bank Risk," Journal of Islamic Monetary Economics and Finance, Bank Indonesia, vol. 9(1), pages 167-198, March.
    • Handle: RePEc:idn:jimfjn:v:9:y:2023:i:1g:p:167-198
    DOI: https://doi.org/10.21098/jimf.v9i1.1590
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    More about this item

    Keywords

    Basel III regulatory capital; Islamic banking; Crisis and risk; System GMM;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance

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