Religious diversity, formal institutional environments and regulatory capital decisions

Abstract

Purpose This study aims to investigate the conditioning effect of formal institutional environments on the relationship between religious diversity and bank capital decisions. Design/methodology/approach The study used random effects, generalised least squares regression and the method of moments quantile regression to analyse cross-country variations in bank capital decisions using data from 151 countries between 2000 and 2021. Findings The findings show managers take more risks and perceive low regulatory capital as an avenue to success and innovation in more religiously diverse countries. Additionally, institutional quality reverts the negative consequence of religious differences on bank regulatory capital in developing and emerging countries but worsens in developed countries. Research limitations/implications The role of deregulation and economic policy uncertainty can be considered for future research on religious diversity and bank capital decision dynamics. Practical implications Bank managers may adapt capital ratios to informal institutional factors in individual countries without overlooking the influence of formal institutional indicators. Originality/value By advancing studies from an institutional perspective, the authors contribute theoretically to the literature by examining the joint effect of the informal and formal institutional environments on regulatory capital decisions. This will help regulators, supervisors and policymakers better understand the drivers of bank regulatory capital decisions to safeguard the banking systems with the right strategy and policy.