Multilevel Drivers of Bank Risk Taking in Dual banking Systems: Evidence From OIC Countries
This study aims to decompose the variance in bank risk taking at three levels and then go on to investigate whether bank regulation and supervision, macroeconomic environment and level of corruption channeled through industry and bank level factors to shape bank risk taking. Particularly, this study explores the threelevel hierarchical structure of bank risk taking through nested data that contained 191 banks (level 1) nested within 2 industries, Islamic vs. conventional (level 2) nested within 11 countries (level 3) and paid particular attention to assessing the possible causal effects of the country, industry and bank specific variables on risk taking. The sample period of this study comprises of 11 years from 2007 to 2017. This study uses a sample of 191 (71 Islamic and 120 conventional) banks with 2,101 observations operating in 11 OIC countries with dual banking systems where Islamic and their conventional counterparts operate alongside each other.
In order to decompose the variance in bank risk taking at three levels, a one-way ANOVA model with random effects is used in which all independent variables are initially ignored. Particularly, the study employs a null model, an unconditional means model for computing the intra-class correlation coefficients. The results show that banks from the same country, or even the same industry, are not especially similar in their risk taking and three-level model therefore offers a significantly better fit to the data than the single-level model.
To explore the multilevel determinants of risk taking this study uses hierarchal linear modeling. The findings show that bank regulation and supervision, macroeconomic environment and corruption channeled through industry and bank level factors to shape bank risk taking. Specifically, at country level, the findings show that bank regulations and supervision, such as, supervisory power and creditor rights help to mitigate the risk taking and make a sound and stable banking system. Further, a detrimental impact of corruption is found for conventional banks that supports the sand the wheel hypothesis of corruption whereas, the findings provide support for the positive contribution of Shari’ah supervision boards to overcome the adverse effect of corruption on riskiness of Islamic banks. At industry level, results exhibit that competitive banking systems improve the stability and banks face less risk taking. Moreover, bank level variables also exert significant influence on risk taking.
The findings of this study are helpful to regulators and policy-makers in formulating and enforcing suitable policies and strategies regarding risk management and improvement of the stability of banks for the betterment of the banking industry in particular and stability of financial system in general.