Bank ownership, institutional quality and financial stability: evidence from the GCC region

This paper empirically investigates the effects of bank ownership and institutional factors on the banking sector financial stability for a sample of 76 banks in the GCC markets. We used the GMM estimator and Merton's DD and PD as our main dependent variables on annual data of 14 years in order to assess the financial stability. The analysis sub-sampled considering private vs state, domestic vs foreign owned, Islamic vs conventional and small vs large vs all banks in the GCC markets. We found all state-owned banks to be more stable than privately-owned banks. However, after controlling for size this finding is true for small but not large state-owned banks. This means as state-owned banks grow in size, they appear to lose their previously held stability advantage and privatisation might be pondered to preserve their financial stability. We also found, in line with the global advantage hypothesis, that foreign-owned banks to be more stable and have a lower probability of default than the domestically- owned banks. In addition, even though our analysis shows that the Islamic banking model did not change the stability level, Islamic banks were found to register a higher probability of default than their conventional counterparts. Finally, with the exception of the rule of law variable, the other three institutional variables were found to positively affect the financial stability the GCC banking sector.