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Bank capital and portfolio risk among Islamic banks

Author

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  • Syed Abul, Basher
  • Lawrence M., Kessler
  • Murat K., Munkin

Abstract

Minimum capital requirements are often implemented under the notion that increased capital improves bank safety and stability. However, an unintended consequence of higher capital requirements could arise if increasing capital induces banks to invest in riskier assets. Several researchers have examined this relationship between bank capital and risk among conventional banks, and interest around this topic has intensifi�ed since the 2007-2008 fi�nancial crisis. However, the fi�ndings are rather mixed. Moreover, very few studies have focused on Islamic banks, which differ greatly from their conventional counterpart's due to their need to be Shariah-compliant. In this paper a sample of 22 Islamic banks is analyzed over a seven year period from 2007-2013. The empirical approach is fully parametric and Bayesian utilizing techniques developed by Kessler and Munkin (2015) and building on previous banking research by Shrives and Dahl (1992) and Jacques and Nigro (1997). Some evidence is found suggesting that increases in total capital positively affect the levels of asset risks among Islamic banks.

Suggested Citation

  • Syed Abul, Basher & Lawrence M., Kessler & Murat K., Munkin, 2017. "Bank capital and portfolio risk among Islamic banks," MPRA Paper 77932, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:77932
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    Keywords

    Islamic Banks; Asset Risks and Total Capital; Panel Data with Endogenous Treatment; MCMC.;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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

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