Abstract
It is generally assumed that oil price shocks have a significant impact on oil-rich countries. Motivated by this belief, we examine how disaggregated oil shocks affect bank risk in the Gulf Cooperation Council (GCC) member countries, specifically Bahrain, Kuwait, Saudi Arabia (KSA), Oman, Qatar, and the United Arab Emirates (UAE), and whether the effects of these shocks varied over the period from January 2006 to September 2020. To address these questions, we apply two measures that capture market-based systemic risk, namely, conditional value-at-risk (CoVAR) and marginal expected shortfall (MES). Consistent with Kilian's (2009) assertion that not all oil shocks have the same effect on an economy, we document two major findings. First, oil supply shocks, rather than oil demand shocks, are the major driver behind increases in the GCC members' bank risk. Second, the change in bank risk in response to these shocks varies over different periods. Specifically, oil price changes during the global financial crisis (2007–2009) and the ongoing COVID-19 pandemic have resulted in greater effects on bank risk from oil demand shocks. Many policy implications emerge from these findings. For example, as banks are the cornerstones of the GCC members' financial systems, monitoring oil supply-related shocks, that is, oil production, is necessary to mitigate financial systemic risk. Moreover, our findings indicate that the GCC members' banking systems are vulnerable to changes in global real economic activities during crises, as we show that aggregate demand shocks have increased bank risk during the COVID-19 pandemic.
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