Determinants of Systemic Risk: The Case of Egyptian Banks

Abstract

This paper aims at analyzing the effects of "size", "financial stability" and "equity return" on the systemic risk of Egyptian banks. This has been conducted using a sample of 11 banks (out of 14 banks listed in the Egyptian exchange), and covering the period from January 2003 to December 2013. Systemic risk is measured by "Value at Risk" that expresses the maximum loss within a q%-confidence interval during a certain period of time. Determinants of systemic risk to be examined, may be economic, as "size" in terms of TBTF rule. They may be financial, where "financial stability" is addressed as the ability of financial system to resolve systemic risks. Besides, "equity return" is assumed as a market determinant. Results indicate that size and financial stability may affect systemic risk of Egyptian banks during research period, using cross sectional analysis, by monthly returns (1-month, 0.99 VaR) for the pre-crisis, during-crisis and all the research periods. Also, robustness check investigates the effect of financial stability, using time series analysis, by daily returns (1-day, 0.99 VaR).

Banking Risk in Selected MENA Countries

“…However, the GCC countries experienced a rapid rise in their debt levels from 21.79% of GDP in 2015 to 38.35% in 2018, where the Bahraini economy is the highest contributor recording percentages of 55. 4 and 80 in 2015 and 2018, respectively. The onset of the COVID-19 pandemic in late 2019 slowed down the world economy, as trade and investment were severely hit by the dramatic disruptions of supply-chain and demand shocks.…”

“…This part includes several studies utilizing different individual bank risk metrics, e.g. Balogh [3]; Alber [4]; Battaglia and Gallo [5], and Hunjra, et al [6] (Check Table 1 in Appendix A for a more detailed review of alternative banking risk measures applied in various studies). Balogh [3] examined the influence of macroeconomic variables on a couple of SR indicators for the banking sector of 27 European countries during 2001-2010.…”

“…Alber [4] used VaR as an SR measure for 11 Egyptian banks from 2003 to 2013. The more likely banks are stable, the higher the z-score value, which will reduce SR but larger banks are riskier.…”

“…Size is directly affecting the risk measure (e.g. Alber [4]; Kleinow and Nell [9]; Khiari and Nachnouchi [10]), however, Hunjra, et al [6] and Weiß, et al [11] determined that larger banks tend to be associated with lower risk. In contrast to most studies considering leverage positively influencing bank risk (such as Anghelache and Oanea [12]; Borri, et al [13]; Sengul and Yilmaz [14]); Cicak [15] and Qin and Zhou [16] reached a result that less leveraged banks are connected to greater risk.…”

The Effect of Applying Banking Regulations on Banking Performance of MENA Region Countries

“…central banks, to adopt strategies, policies and tools for reform, through the issuance of new laws and regulations and amendments to the previous regulations in such a way as to ensure an appropriate level of regulation, supervision and transparency in the banking sector, helping to reduce the risks to which it is exposed, increase performance and improve the capacity and efficiency of banking performance in this region. It's important to pinpoint that profitability has lost its attractiveness as a key performance indicator and this may explain why literature trends focus on financial stability and banking efficiency (e.g., Alber, 2015; more than profitability and market share (e.g., Alber, 2009;Gayed et al, 2009). Moreover, Alber (2018) indicates that "Optimality of Banking Financial Structure" may affect both of "financial stability" and "banking efficiency".…”