Government Ownership, Competition, and the Risk-Taking Attitude of the GCC Banking System

Abstract

Purpose – In the recent financial crisis, the risk-taking behavior of banks led to severe financial and economic instability. Many reasons have been attributed to the cause of the financial crisis. This paper attempts to investigate the effect of government ownership, market structure, and regulations on risk-taking behavior in a sample of banks listed on the stock exchanges of the six Gulf Cooperative Council (GCC) markets during the period from 1998 until 2010.

Methodology – The paper utilizes the fixed effect regression model to measure the impact of government ownership indicator, and market structure on risk while controlling for bank-specific characteristics and macroeconomic indicators in the GCC region.

Findings – We find consistent evidence that private-owned banks are more risky than government-owned banks. The results also show a positive and significant relationship between market concentration and risk. Islamic banks show more stability than conventional banks, while government regulations are insignificantly related to risk.

Originality and value – This research is essential to understand the probability of government ownership entities facing losses associated with distress due to both direct and indirect insurance guarantees provided by the government agencies in case of crisis. The results of the study are crucial for understanding the implications of bank ownership and market structure and its relation to risk for the stability of the financial system in the GCC market.

Citation

Al-Khouri, R. (2012), "Government Ownership, Competition, and the Risk-Taking Attitude of the GCC Banking System", Ferris, S.P., John, K. and Makhija, A.K. (Ed.) Advances in Financial Economics (Advances in Financial Economics, Vol. 15), Emerald Group Publishing Limited, Leeds, pp. 173-193. https://doi.org/10.1108/S1569-3732(2012)0000015009