IMF published a working paper that examines whether compliance with Basel Core Principles (BCPs) for effective banking supervision affects bank stability and risk taking by comparing conventional and Islamic banks. This paper not only extends the analysis to cover Islamic banks, as compared to conventional banks, but also focuses on banks operating mainly in developing and emerging countries.
The IMF study was based on an initial sample of 761 conventional and Islamic banks in 19 countries covering the period from 1999–2013. The paper provides robust evidence that compliance with BCPs has a strong positive effect on the Z-score of conventional banks, albeit less pronounced on the Z-score of Islamic banks. Using a sample of banks operating in 19 developing countries, the results appear to be driven by capital ratios, a component of Z-score for the two types of banks. Even though smaller on Islamic banks, individual chapters of BCPs also suggest a positive effect on the stability of conventional banks. The findings support the effective role of BCP standards in improving bank stability, whose important implications led to the Islamic Financial Services Board (IFSB) publication of new recommendations in 2015 to bring BCP standards in line with the Core Principles for Islamic Finance Regulation (CPIFR) standards. The findings suggest that because Islamic banks are benchmarked closely to BCPs, the implementation of CPFIRs should also positively affect their stability.
Related Link: IMF Working Paper (PDF)
Keywords: International, Banking, Islamic Banking, BCP, Financial Stability, IMF
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