Financial stability oh islamic banks: a systemic risk perspective

The late global financial crisis reveled the fragility of the conventional banking system under an adverse systemic event, but highlighted Islamic banks resilience in comparison with their conventional counterparts. The aim of this thesis is to empirically assess the claim regarding Islamic banks strength to support the financial system stability, based on measuring their systemic risk contribution to the overall financial system. The work is applied is applied first to the MENA region from 2007 to 2014, and is applied next to the GCC region from 2005 to 2014. We use stock market returns of publicly traded banks, which we classify into fully-fledged Islamic banks (IB), conventional banks (CB), and conventional banks with Islamic services window (CBwin), from which we construct stock market banking indices (banking sectors), and measure the systemic risk taking into consideration the interconnectedness of the banking sectors within the financial system. We measure the systemic risk of the banking sectors using correlation network models, augmented by equity based market measures of MES, SRISK, ∆CoVaR, and CES, and we extend those measures by developing netted systemic risk measures that employ partial correlation instead of the marginal one, to take the multivariate nature of systemic risk into account. We test our novel NetMES measure using the Bayesian averaging analysis. The results confirm the lower contribution of Islamic banks to systemic risk, and thus their strength to support the financial stability, under the limitation of the crisis materialization within the real economic side, upon which the IB banking sector stability and strength deteriorates.