Macroprudential policies, crisis and risk-taking: Evidence from dual banking systems in GCC countries

Abstract

Purpose

The role of macroprudential policies (MPPs) in influencing bank risk-taking has recently attracted significant attention in the literature. Several studies have emerged, both at the cross-country level as well as at the level of individual countries that have examined this issue. However, whether and to what extent do MPPs affect risk-taking by Gulf Cooperation Council (GCC) banks has not been investigated in prior empirical research. Toward this end, using data during 1996-2010, the author examines the impact of MPPs on risk-taking by GCC banks. The author considers the entire gamut of MPPs – those focused on credit, capital and liquidity – and how they impact bank risk.

Design/methodology/approach

In view of the possible endogeneity between the dependent variables and the crucial independent variable (i.e. MPP), the paper uses advanced panel data techniques that address this endogeneity. Toward this end, the author uses dynamic panel data methodology to examine the interlinkage between bank risk taking and MPPs for GCC banks.

Findings

The findings appear to suggest that although MPPs are useful, not all of them are equally effective in containing the potential build-up of financial stress. Viewed from this standpoint, it appears that capital adequacy ratios and reserve requirements are the ones with maximum efficacy in limiting potential build-up of risks. Classifying the MPPs as per their impact on major balance sheet variables, the results indicate that capital-related measures tend to exert the greatest impact on credit.

Originality/value

A significant volume of literature has emerged in recent years that examine the efficacy of MPPs on bank risk-taking. Notwithstanding available cross-country research, limited analysis on this aspect in the context of GCC banks. Toward this end, an extended sample of GCC banks has been used to examine this issue. To the best of the author’s knowledge, this is one of the earliest studies for GCC banking systems to examine this issue.

Citation

Ghosh, S. (2016), "Macroprudential policies, crisis and risk-taking: Evidence from dual banking systems in GCC countries", Journal of Islamic Accounting and Business Research, Vol. 7 No. 1, pp. 6-27. https://doi.org/10.1108/JIABR-03-2014-0011