Bank regulation, ownership and risk taking behavior in the MENA region: policy implications for banks in emerging economies

Abstract

This paper investigates the impact of bank regulation and ownership on the risk-taking behavior of financial institutions in the MENA region. We test the hypothesis that the effect of regulation on bank risk depends on the type of ownership structure. The public and private views of bank regulation are used to explain the relationship between regulatory measures and bank risk. We find that the official supervisory index exerts a positively associated with bank credit risk which is in line with ‘private interest view’ of bank regulation; however, private monitoring does have an opposite effect. The analysis of the regulatory measures impact on bank insolvency risk provides further support of the private interest view regarding the impact of market discipline. In addition to regulations, ownership structure (e.g., ownership concentration and foreign ownership) also plays a significant role in shaping the risk-taking behavior of banks in the MENA region. Our analysis reveals that the effect of banking regulations on risk-taking behavior strongly depends on the type of ownership structure prevailing in each banking system (Islamic and conventional). Our findings inform regulatory authorities concerned with improving the financial stability of banking sectors in the MENA countries and other emerging economies where Islamic and conventional banks co-exist, to carefully tailor banking reform initiatives depending on the type of the banking system as they may pursue different risk management strategies. Supplementary Information The online version contains supplementary material available at 10.1007/s11846-022-00529-5.

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