Capital Regulation and Risk-taking Behavior: Empirical Evidence for Islamic Banks

Abstract

This paper investigates whether regulatory pressures have an impact on the relationship between change in capital and bank risk-taking. On the basis of a well developed theoretical background, capital regulation constitutes the core of prudential regulation within the banking sector. Several researches have investigated this relationship between capital and risk in conventional banks, and this subject has gained in interest since the last financial crisis. This study is one of the few studies that have attempted to provide empirical evidence on this issue for Islamic banks. We use data of Islamic banking sectors over the period 2010–2014. The results reveal that Islamic banks tend to behave differently at each level of capital adequacy. In addition, we provide some evidence that change in capital is positively related to the change in risk for highly capitalized Islamic banks.

Banking Regulation and Financial Soundness Nexus in View of the Crisis: An Islamic Banking Perspective

“…The standard on the supervisory review process, known as IFSB-5 (2007), recommends that supervisors should ensure that appropriate systems are in place, including SB. In addition, another current of literature has investigated Islamic banking under different aspects, such as financial stability (Abedifar et al, 2013;Beck et al, 2013;Čihák and Hesse, 2010;Daoud and Kammoun, 2020b;Othman et al, 2023), supervisory and regulatory issues (Nastiti and Kasri, 2019;Smaoui and Ghouma, 2020;Daoud and Kammoun, 2022), and corporate social responsibility (Hanic and Smolo, 2023;Jusoh and Ibrahim, 2017), expanding the debate on Islamic banking by focusing on the risk characteristics of the Islamic banking system (Aydemir et al, 2023;Mateev and Nasr, 2023;Umar et al, 2023). The Islamic banking sector has also benefited from relative advancements in terms of technological innovations and supporting infrastructure and regulation (Alshater et al, 2022).…”