Oil structural shocks,bank-level characteristics,and systemic risk: Evidence from dual banking systems |
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Institution: | 1. Department of Accounting and Finance, United Arab Emirates University, United Arab Emirates;2. Department of Accounting and Finance, The Citadel,The Military College of South Carolina, SC, USA;3. Department of Finance and Economics, College of Business Administration, University of Sharjah, United Arab Emirates |
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Abstract: | By performing a structural VAR analysis on oil price shocks, we provide an evidence on how the origins of oil price shocks impact the risk level of banks in oil-exporting countries and whether bank-level characteristics can influence the sensitivity of risk to oil shocks. When conducting panel regression analysis, we document the following findings. First, not all shocks have the same effect on bank risk. Due to oil supply shocks, the increase in oil price raises bank risk, whereas the similar increase in price due to economic expansion or oil-market specific demand reduces that risk. Second, the business model (whether the bank is Islamic or conventional), size, income diversification, profitability, and financial leverage influence the bank risk exposure to oil shocks differently. Third, the two major recent crises (global financial crises and COVID-19 pandemic) magnified bank risk exposure to oil supply shocks and speculative oil demand shocks. Overall, the structural oil shocks explain a large fraction of the variation in financial stability in GCC countries. |
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Keywords: | Bank risk Financial stability Oil price shocks GCC countries Global crises Bank-level characteristics |
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