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Bank risk and financial development: evidence form dual banking countries

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Date
2020
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Abstract
This study examines the impact of financial development on bank risk-taking, measured as bank capitalization and bank income diversification. We observe the relationship using annual bank-level data from countries with dual-banking systems. The dataset spans from 2000 to 2014. Our results suggest that the impact of financial development on bank capitalization is heterogeneous across Islamic and conventional commercial banks. Moreover, the effect is different across listed and unlisted banks. However, on average, the response of income diversification to financial development is similar across most specifications. Additionally, bank risk is found to be countercyclical, suggesting that bank risk increases in good times. On average, these results (countercyclical evidence) hold across bank types (Islamic and conventional) and ownership structure (listed and unlisted). However, these results are contingent on the size (small vs. large) factor. The results are robust to alternative proxies of financial development.
Keywords
Bank capitalization , Dual-banking system , Financial development , Income diversification , Islamic banks
Citation
Abdul Hamid, B., Naeem Azmi, C. W., & Ali, M. (2020). Bank risk and financial development: evidence form dual banking countries. Emerging Markets Finance and Trade, 56(2), 286-304. https://doi.org/10.1080/1540496X.2019.1669445
Publisher
Taylor & Francis Group

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