Basel Regulations and Banks’ Risk-efficiency Nexus: Evidence from Dynamic Simultaneous-equation Models

Abstract

ABSTRACT This study is designed to investigate the causality links binding the risk and efficiency factors within both of the Islamic and conventional banks contexts, highlighting the effect of regulatory standards and protocols. Relying on previously elaborated theoretical priors guidelines, a particular set of five regulatory tools has been considered, namely, capital requirement, official supervisory power, bank activities associated restrictions, deposit insurance and market discipline as well as private monitoring. Empirical results provide evidence that the same regulations appear to differently affect both of the distinct banking models. Overall, empirical investigations show that deposit insurance and market discipline stand as the unique regulatory instructional frameworks likely to help in reducing the risk-taking behavior of both of the Islamic and conventional banking systems, while different results have been attained in regard of the for bank efficiency dimension.