Banking crises, competition, and financial stability: evidence from the Middle East and North Africa (MENA)

Abstract

Over the last three decades, both academic researchers and regulators have extensively studied the impact of financial reforms, deregulation, and innovation in relation to financial stability and banking systems’ challenges. In the Middle East and North Africa (MENA), which is one of the important economic regions in the world due to its geographic location and human and natural resources, these forces particularly come at interplay, which merits research. Against this backdrop, this thesis examines the banking crises, competition, and financial stability throughout the MENA region. We investigate the systemic banking crises over the period 1980 to 2018 throughout the MENA region and builds a suitable Early Warning System (EWS), given its centrality for policymakers, especially after the Global Financial Crisis (GFC) of 2007-2009. This thesis proceeds to survey the MENA region’s macro and financial sector, which lays bare the importance of this empirical analysis. Concertedly, it provides a coherent analysis of systemic risk and identifies the causes of banking crises which, when understood, could lead to the design of an appropriate EWS. We consider the inclusion of liquidity and unweighted capital adequacy ratios, in addition to macroeconomic variables, as crucial for regulators to strengthen their macroprudential regulatory framework and build consistent procedures in accordance with the international standards (i.e., Basel III requirements). In order to use these two explanatory variables, we construct a full dataset. The thesis manifests itself in the analysis of 732 MENA banks whose multi-sourced data led to the construction of the two main regressors for the examined period- the liquidity and the unweighted capital adequacy ratios. Moving forward, we resort to structural and non-structural approaches to investigate banking competition in each country in the MENA region over the extended period of 1995-2018, which covers significant economic and political events in the region. Furthermore, we adopt the portmanteau approach of De-Ramon and Straughan (2016) to estimate banking competition measures, as previously used in the literature. Subsequently, the analysis compares the results in different countries over the period and assesses the trends of competition intensity. We examine convergence in bank competition across MENA countries. Moreover, we study the relationship between concentration, competition and bank stability by using several bank competition measures, including 5-bank concentration ratio, the Herfindahl-Hirschman Index (HHI) and the Lerner index and bank risk measures such as insolvency risk (Z-score), credit risk, liquidity risk, portfolio risk, and leverage risk. Given the region’s political instability and socio-economic turmoil for almost a century, we incorporate an indicator of political risk in order to assess its effect on bank stability. Investigating this effect is crucial for policymakers in this region who set monetary policies specifically to enhance financial stability and ensure macroeconomic stability. This thesis provides insights into the relationship between competition and stability in the MENA region and offers results that will help policymakers set new policies and comply with international standards.