Abstract
In this empirical study, we investigate the effect of the 2008 economic crisis on the level of risks Islamic banks (IB) and conventional banks (CB) are facing and the determinants of their risk indices. We cover 20 banks operating in the Gulf Cooperation Council (GCC) countries during 2001-2014. The results indicate that while the state of the economy had no effect on the risk index (RI) of banks, the type of bank did have an effect. The results suggest that the RI of IB was significantly lower than that of CB before and after the crisis indicating higher risks for IB. While the RI of CB is explained by solvency and liquidity variables, the RI of IB is explained by liquidity and profitability variables. Discussions, interpretations of research results and implications are provided.
Highlights
The recent economic crisis has raised many questions regarding bank risks
The results show that the risk index (RI) of Islamic banks (IB) is significantly lower than that of conventional banks (CB) before and after the crisis indicating a higher risk for IB
The results indicate that the ratio of loans to total assets and the ratio of loan to deposits are the only variables explaining the variation in the RI of CB at times of instability
Summary
The recent economic crisis has raised many questions regarding bank risks. Ever since the start of the 2008 economic downturn, banks were exposed to tremendous pressures from regulators and clients to exercise more control over their risks. Goodhart (2008) listed many policies and regulatory issues commanding serious discussions. Goodhart (2008) listed many policies and regulatory issues commanding serious discussions These issues are scale and scope of deposit insurance, bank insolvency, central banks roles, liquidity risk management, capital adequacy requirements, the scope of regulation and crisis management. The extent of the effect of the crisis on bank risks has not been fully researched, especially with the existing structural differences between IB and CB. The relevant literature will be reviewed to discuss the various definitions of bank’s RI and its determinants From such a discussion, we should be able to extract the research hypotheses and the factors representing the dependent and explanatory variables.
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