Terrorist attacks and bank financial stability: evidence from MENA economies

Marwa Elnahass,Mohammed Elgammal,Mohamed Marie

doi:10.1007/s11156-022-01043-1

Marwa Elnahass, Mohammed Elgammal + Show 1 more

Open Access

https://doi.org/10.1007/s11156-022-01043-1

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Abstract

This study examines the impact of terrorism on bank stability, represented by bank risk and financial performance. We consider banks from 14 countries located in the Middle East and North Africa region for the period 2010–2018 using both the three-stage least-square and the generalised method of moments. The results provide strong evidence that banks located in countries with high exposure to terrorist attack exhibit low financial stability, due to high bank risk (i.e., high credit and insolvency risk). However, these banks show high financial performance (i.e., high profitability and cost efficiency), on average. Our results also show differential impacts on bank stability for countries marked as more (less) exposed to risk of attacks. For banks located in high-income-generating countries, we find that exposure to terrorism is associated with low financial performance and high credit risk, which is the opposite case for low-income-generating countries. Our results also indicate high systemic risk for listed banks operating under high terrorism risk exposure.

Highlights

As the banking industry moves towards sophisticated financial technology, evidence relating to the financial stability of banks is still accumulating
We investigate the impact of systematic risk for our sampled banks, using Conditional value‐at‐risk (CoVaR) analyses; we find high systemic risk for listed banks operating under high terrorism risk exposure
Findings remain to be economically significant in line with the main findings. These findings indicate that the differential impacts of terrorism on bank stability are conditional on the degree of exposure to terrorism risk across Middle East and North Africa (MENA) countries

Summary

Introduction

As the banking industry moves towards sophisticated financial technology, evidence relating to the financial stability of banks is still accumulating. Banks play an important role in economic growth, through their role as intermediaries between savers and depositors. They provide funds for activities that support enterprise, which fosters a strong and healthy economy. Financial instability can be very costly for the banking industry due to its contagion or spillover effects to other parts of the economy. Terrorist attacks increase mobilisation from the attacked area, which affects economic activities and demand for financial services. Terrorism may affect the economy’s productivity by raising the costs of transactions through increased security measures, higher insurance premiums, higher financial costs, and other counter-terrorism regulations (Johnston and Nedelesc 2006). Shahbaz (2013) finds that terrorism increases inflation, while Raza and Jawaid (2013) show that an increase in terrorism events reduces tourism revenues. Estrada et al (2015) and Sandler and Enders (2008) explain the detrimental impact of terrorism on the economy by the rational choice theory because the government’s decision to fight terrorism should be a trade-off between the costs of acquiescing to the terrorism agenda and the costs of fighting it

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