Empirical Analysis of Post-2009 Crisis Interventions on the Stability of Banks

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This paper investigates the behavior of assisted UAE banks four years after specific government intervention programs that were applied to them in 2009-10 using panel corrected standard error (PCSE) model estimation and artificial neural network (ANN). The study results demonstrate that government interventions in the UAE banking sector in 2009 crisis negatively affected banking sector stability in the long-run. The economic significance of these effects is that government intervention is found to decrease a bank’s stability (increase riskiness) in the range of almost 14% to 37%, because of reduced market discipline and less efficient banking structure. The coefficient for banks’ credit activities is negatively related with bank stability, which implies that banks with higher proportions of loans in their portfolio face lower stability and a higher risk level. This is supported by the fact that, (though statistically less significant), banks that are less efficient (ER) tend to engage in riskier activities thus reducing banks’ stability. ANN was found to be superior to PCSE analysis in predicting Stability (riskiness) of the UAE banks post-bailout in terms of correct classification percentage lowest RMSE, AIC in holdout sample, and key factors of importance identified in ANN that were not significant in PCSE. The methodological implication is that ANN study results can also be used by decision makers and policy makers to prioritize different factors to adjust the weight of these factors in their policy strategies. Index of Acronyms ADSE Abu Dhabi Security Exchange AED Arab Emirate Dirham AI Artificial Intelligence ANN Artificial neural network CAGR Compound annual growth rate CDs Certificates of Deposit CVH Charter value hypothesis DFM Dubai Financial Market DiD Difference in difference DIFC Dubai International Financial Centre ETF Exchange-traded funds GDP Gross Domestic Product HHITA Concentration measure - Herfindahl Index - Total Assets IMF International Monetary Fund LLP/R Loan loss provisions/reserves MSTA Market share to Total Assets OECD Organization of Economic Cooperation & Development PCSE Panel corrected standard error RBS Royal Bank of Scotland ROA Return on Assets ROE Return on Equity SCP Structure, Conduct and Performance SWFs Sovereign Wealth Funds UAE United Arab Emirates Y-o-Y Year on Year σ Standard deviation