Determinants of Financial Stability of the Banking Sector: Empirical Study

The primary purpose of this thesis is to identify the main determinants of bank stability to build a practical framework for safeguarding financial stability by focusing on the two separate samples. Firstly, to investigate the bank stability determinants of Islamic banks and their conventional peers using a sample of 254 banks across the nine leading countries (QISMUT+3) dual banking systems over the period 2011-2017. Findings present a positive association between good governance, financial freedom, and bank stability. On the other hand, corruption and economic freedom have a damaging effect. The legal systems of countries do not show any enhancement effect over bank stability is one of the basic damaging effects. According to findings religiosity concentration improves stability, banks’ religiosity does not provide any stability advantage. Among the macroeconomic and bank-specific indicators, GDP growth and cost efficiency are the major stability determinants. Secondly, it is aimed to find out the relationship between oil and gold prices and the financial stability of Islamic banks operating in the Gulf Cooperation Council countries for 2005-Q1 to 2018-Q1. For this purpose, first, it uses Johansen cointegration and VECM methodologies. employs the newlydeveloped Bayer–Hanck, Gregory–Hansen, Toda–Yamamato, and DOLS methodologies to test the robustness of the findings. Results reveal a cointegrating relationship and equilibrium-correcting mechanism between the two commodities prices and the bank stability. Both commodities prices have positive effects on bank stability in the short run. However, the oil price has a positive impact in the long run, while the gold price has a negative effect on the long run. The causality results confirm unidirectional causality from oil and gold prices to bank stability in the short run and oil price to bank stability in the long run.