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Dual Banking and Financial Contagion

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  • Nabi, Mahmoud Sami

Abstract

This paper builds a theoretical model based on Allen and Gale (2000) to analyse how unexpected shock affecting the banking assets in one region can generate bankruptcy in a second region. I also analyse the effect of the presence in a third region of an Islamic bank on the vulnerability of conventional banks to financial contagion. It is interestingly shown that the Islamic bank assets’diversification strategy across the regions reduces the likelihood of financial contagion among conventional banks.

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File URL: http://mpra.ub.uni-muenchen.de/49814/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49814.

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Date of creation: Nov 2012
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Handle: RePEc:pra:mprapa:49814

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Keywords: Islamic Banking; Conventional Banking; Financial Crisis;

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References

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  1. Joshua Charap & Serhan Cevik, 2011. "The Behavior of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey," IMF Working Papers 11/156, International Monetary Fund.
  2. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
  3. Heiko Hesse & Nathaniel Frank & Brenda González-Hermosillo, 2008. "Transmission of Liquidity Shocks," IMF Working Papers 08/200, International Monetary Fund.
  4. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
  5. X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank.
  6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  7. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  8. Martin Čihák & Heiko Hesse, 2010. "Islamic Banks and Financial Stability: An Empirical Analysis," Journal of Financial Services Research, Springer, vol. 38(2), pages 95-113, December.
  9. El-Hawary, Dahlia & Grais, Wafik & Iqbal, Zamir, 2007. "Diversity in the regulation of Islamic Financial Institutions," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(5), pages 778-800, February.
  10. Adrian, T. & Shin, H S., 2008. "Liquidity and financial contagion," Financial Stability Review, Banque de France, issue 11, pages 1-7, February.
  11. Jemma Dridi & Maher Hasan, 2010. "The Effects of the Global Crisison Islamic and Conventional Banks," IMF Working Papers 10/201, International Monetary Fund.
  12. Chong, Beng Soon & Liu, Ming-Hua, 2009. "Islamic banking: Interest-free or interest-based?," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 125-144, January.
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