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How do banks’ capital regulation and risk-taking respond to COVID-19? Empirical insights of ownership structure

Author

Listed:
  • Syed Moudud-Ul-Huq
  • Kawsar Ahmed
  • Mohammad Ashraful Ferdous Chowdhury
  • Hafiz M. Sohail
  • Tanmay Biswas
  • Faisal Abbas

Abstract

Purpose - This study aims to investigate the relationship between capital regulation and risk-taking behavior (financial stability) concerning the impacts of the recent global (COVID-19) crisis and diverse ownership structure. Design/methodology/approach - The analysis uses an unbalanced panel data set from 32 commercial banks of Bangladesh for 2000–2020. The authors use the two-step system generalized method of moments and three-stage least squares to produce the study outcomes. Findings - The robust results reveal that the relationship between capital regulation and risk (financial stability) is negative (positive) and bi-directional. More significantly, COVID-19 makes banks fragile and demands more capital to absorb risk. However, the effect of COVID-19 is heterogeneous when the authors consider ownership structure. Among the diverse ownership styles, Islamic and active shareholding show their controlling wheel on capital regulation and risk-taking aptitude (financial stability) during the global (COVID-19) crisis. In normal economic conditions, private banks and minority active shareholding can be a good determinant for capital regulation and risk (financial stability). On the other hand, state-owned and large banks have been found as less capitalized and highly risky. Originality/value - This study is the pioneer in exploring capital regulation and risk toward the recent global (COVID-19) crisis.

Suggested Citation

  • Syed Moudud-Ul-Huq & Kawsar Ahmed & Mohammad Ashraful Ferdous Chowdhury & Hafiz M. Sohail & Tanmay Biswas & Faisal Abbas, 2021. "How do banks’ capital regulation and risk-taking respond to COVID-19? Empirical insights of ownership structure," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 15(2), pages 406-424, October.
    • Handle: RePEc:eme:imefmp:imefm-07-2020-0372
    DOI: 10.1108/IMEFM-07-2020-0372
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    More about this item

    Keywords

    COVID-19; Capital regulation; Risk-taking; Financial stability; Ownership structure; Commercial banks; C23; G10; G21; G32;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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