The simultaneous estimation of credit growth, valuation, and stability of the Gulf Cooperation Council banking industry

Abstract

We use a simultaneous equations model to study the relationship between bank stability, performance and credit growth for 59 GCC banks over the period 2004–2012. To derive our results, we use a dynamic panel estimation using the two-stage generalized method of moments technique (2SGMM). The results show a high degree of persistence of GCC bank profitability, stability and credit growth. Stable banks tend to expand credit faster, and are more profitable. Bank credit growth did not seem to affect bank stability up to a certain level; however, at a higher level of credit growth, banks become less stable. Government ownership significantly affects both the stability and credit growth of the banking system. Our results suggest a need for more stringent risk-based supervision, so as to monitor and control loan growth and to provide early warnings of the potential risks associated with rapid credit growth by weaker banks.