Threshold effects of liquidity risk and credit risk on bank stability in the MENA region |
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| Institution: | 1. Essex Business School, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK;2. Department of Banking and Finance, Southampton Business School, University of Southampton, Building 2, 12 University Road, Southampton SO17 1BJ, UK;3. School of Business and Economics, Loughborough University, LE11 3TU, UK;1. Bucharest University of Economic Studies, Faculty of Finance, Insurance, Banking and Stock Exchange, Department of Money and Banking, Romania;2. Institute for Economic Forecasting, Romanian Academy, Romania;1. Department of Finance and Economics, College of Business Administration, University of Sharjah, United Arab Emirates;2. Department of Finance and Banking, Faculty of Business and accountancy, University of Malaya, Kuala Lumpur, Malaysia;3. Department of Business Administration, Faculty of Business Studies, International Islamic University Chittagong, Bangladesh |
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| Abstract: | This paper studies the relationships between both liquidity and credit risks on bank stability for a panel data set of 75 conventional banks belonging to 11 countries of the MENA region observed during the period 1999–2017. By performing a Panel Smooth Threshold Regression (PSTR) model developed by Gonzalez et al. (2005), estimation results show that the relationships between bank stability-credit risk and bank stability-liquidity risk are non-linear and characterized by the presence of two optimal thresholds which are equal to 13.16% for credit risk and 19.03% for liquidity risk. Contrary to their positive effects below these optimal thresholds, credit risk and liquidity risk become detrimental to bank stability in high regime.To ensure their stability, banks are encouraged to revise the primacy given to credit activity and diversify their activities to improve profitability. They are also recommended to strengthen their own funds and opt for appropriate restructuring to ease their small size. As for the States of the selected countries, they have to deeply reform their financial systems and develop the legal framework relating to new techniques of external management of banking risks including securitization and defeasance. Likewise, these states are fortified to ensure political stability, which is a key factor for banking and financial stability. |
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| Keywords: | Liquidity risk Credit risk Bank stability PSTR model MENA region |
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