Regulations and bank risk taking in dual banking countries

Abstract

This study investigates the linkages between the banking regulatory and supervisory structures associated with the pillars of Basel III and the risk taking of banks. Given a well-established set of theoretical priors, the regulations considered in this study are official supervisory power, capital requirements, private monitoring and restrictions on bank activities. The analysis focuses on the dual banking system over the period 2006–2010. Our results suggest that higher capital requirements induce a lower level of risk behaviours for both conventional and Islamic banks. We observed the opposite effect in the case of restrictions on bank activities; higher restrictions had a positive influence on the risk-taking behaviour of conventional banks, whereas they reduced the level of riskiness of Islamic banks. Finally, official supervisory power has an insignificant negative impact on the risk-taking behaviour of both Islamic banks and conventional banks.