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Time series analysis of financial stability of banks: Evidence from Saudi Arabia
Institution:1. Umm Al-Qura University, Department of Economics, PO Box 14266, Makkah, 21955 KSA, Saudi Arabia;2. University of Rome “La Sapienza”, Department of Statistics, P.le A. Moro 5, 00185 Roma, Italy;1. École Polytechnique Fédérale de Lausanne, Chair of International Finance, Station 5, Odyssea ODY 2.05, Lausanne CH-1015, Switzerland;2. Banco de México, Dirreción General de Investigación Económica, 5 de Mayo 18, Ciudad de México 06059, Mexico;3. Federal Reserve Bank of Richmond, 502 S. Sharp Street, Baltimore, MD 21201, United States;1. CME Group, Chicago, IL, United States;2. Business & Finance, The Citadel, Charleston, SC, United States
Abstract:Islamic banks are characterized by their compliance to Islamic laws and practices, primarily the prohibition of interest and the trading of loans. During the 2008–2009 financial crisis, when a large number of conventional banks announced bankruptcy, no Islamic bank failures were reported. However, there is no clear consensus in the literature on the question of whether Islamic banks are more or less stable than conventional banks. To shed some light on this issue, we studied a sample of Saudi banks using quarterly data over a period centered on the 2008 financial crisis. Careful analysis of the data suggested first of all that many of the variables typically used in financial stability studies may be non-stationary, a methodological point largely ignored in the literature. Using time series methods suitable for this type of data, we concluded that individual heterogeneity may matter more than either the conventional or Islamic nature of the banks. Concentrating on the largest banks, we find the Islamic banks contribute positively to the stability of the system.
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