Capital, charter value, and risk: Are Islam and conventional banks different?

Han, Pei Wun (2013). Capital, charter value, and risk: Are Islam and conventional banks different? Honours Thesis, UQ Business School, The University of Queensland.

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Author Han, Pei Wun
Thesis Title Capital, charter value, and risk: Are Islam and conventional banks different?
School, Centre or Institute UQ Business School
Institution The University of Queensland
Publication date 2013-10-24
Thesis type Honours Thesis
Supervisor Mamiza Haq
Robert Faff
Total pages 115
Language eng
Subjects 1502 Banking, Finance and Investment
Abstract/Summary The destructive nature of the Global Financial Crisis 2007/2008 has left bank regulators and supervisors scrambling in search for more effective disciplinary tools to control excessive bank risk-taking. One of the main criticisms directed towards financial institutions is the inadequate holding of capital reserves. As a result, on 12th of September 2010, the Basel Committee on Banking Supervision recommended a substantial strengthening of existing capital requirements, applicable to all banks regardless of bank type. Yet, evidence suggests that the theoretical and operational differences between conventional banks and Islamic banks could result in different risk profiles. I pose the question of whether bank capital and charter value, another important disciplinary tool documented by prior literature, affect risk in conventional banks and Islamic banks differently. In this study, I develop and test a model of bank risk-taking for banks across 24 countries from the period 1998-2011. I document several key findings. First, bank capital lowers risk, but this effect varies between conventional banks, Islamic banks, and commercial banks with an Islamic window. I also provide evidence on the non-linear relationship between capital and risk, particularly for conventional banks. Second, while charter value reduces risk-taking incentives in conventional banks, no such evidence is found in Islamic banks. Thus, the effect of the disciplinary tools on risk in conventional and Islamic banks differs. Third, the effect of capital in risk-reduction diminishes in banks with high charter value. Lastly, the role of bank capital and charter value in reducing risk becomes even more prominent after the Global Financial Crisis 2007/2008. This study depicts a broader picture for the benefit of regulators and policymakers by teasing out the relevance of bank capital and charter value to bank risk-taking.

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Created: Mon, 03 Feb 2014, 14:39:01 EST by Karen Morgan on behalf of UQ Business School