In this paper, we explore whether economic uncertainty differently affects the default risk of Islamic and conventional banks. Using a sample of 568 banks from 20 countries between 2009 and 2018, we use the World Uncertainty Index (WUI) by Ahir et al. (2018) to conduct a study based on a comparable measure across countries. Our findings indicate that economic uncertainty increases the default risk of conventional banks but does not affect Islamic banks’ default risk. To understand why, we explore the influence of religiosity, institutional factors, and bank-level heterogeneity. We observe that Islamic banks’ default risk is not significantly affected by uncertainty in all types of countries, but such a difference with conventional banks mainly holds for banks with higher income diversification, larger size, and that are publicly traded. Moreover, our findings show that conventional banks suffer more from uncertainty in terms of stability in countries with higher religiosity and with a higher share of profit-loss sharing (PLS) contracts. Our results are robust to alternative estimation techniques to deal with endogeneity and to alternative variable measurements.

<div> We contribute to the relationship banking literature by uncovering the impact of a prior banking relationship on borrower's incentives to avoid default. As an identification strategy we exploit a proprietary dataset comprising 149,230 mortgage loans tracked monthly over a two-year period in a unique institutional setting that allows us to isolate the influence of borrower's incentives. Our findings indicate that a pre-existing relationship diminishes borrower's default risk by approximately 4%, exclusively attributable to the value of the relationship for the borrowers. This effect persists even during the notable surge in loan defaults during the COVID-19 pandemic. Our results also show that the impact of preexisting banking relationships on avoiding default is stronger for wealthier, more religious, and male borrowers. </div>

This paper examines the influence of non-interest activities on bank lending in terms of loan quality and interest spread. We also investigate the possible existence of profit complementarities between non-interest activities and lending. Using quarterly data on 6921 U.S. commercial banks between 2007:Q3 to 2016:Q3 we find that non-interest activities have no adverse influence on bank credit risk. This is the case for banks of different asset size (including systemically important banks) as well as for distressed banks. There is evidence that banks with assets between 100 million and 1 billion that have a greater share of fiduciary income have lower credit risk. They also have lower interest rates on loans secured by real estate, and higher franchise values, particularly post-crisis. Moreover, banks in the aforementioned size range benefit from synergies in joint production of non-interest income and lending, whereas other banks, in particular smaller banks (below $100 million in assets) suffer from diseconomies of joint production. Larger banks exhibit cross-subsidization between several non-interest activities and lending business.

Banks play a central role in the financial system and benefit the real economy by managing risk, and providing finance to households, small and medium-sized enterprises, large corporates and governments. However, their complexity, opacity and interconnectedness can elevate bank-level and systemic risks, posing dangers to the financial system and real economy. This was evident during the global financial crisis where taxpayer funded bailouts were used to rescue ailing banks, which in turn led to an overhaul of regulation and supervision. Consequently, safeguarding bank stability and addressing systemic risks via well designed regulations is essential for ensuring economic resilience and societal well-being. This study uses a quasi-natural experimental research design in the form of the Dutch Liquidity Balance Rule (LBR) to evaluate the impacts of liquidity regulation on bank-level stability and systemic risk. Our findings show that following the introduction of liquidity regulation, the stability of Dutch banks increases significantly relative to counterparts in neighbouring countries unaffected by the regulation. The observed reduction in risk stems from improved capitalization and reduced leverage, which contribute to greater financial stability. Systemic risk also decreases. Our findings have relevance beyond our research setting for policymakers tasked with implementing and monitoring the impacts of similar forms of liquidity regulation (such as bank liquidity coverage ratios) post global financial crisis.

Using detailed ownership data for a sample of European commercial banks, we analyze the link between ownership structure and risk in both privately owned and publicly held banks. We consider five categories of shareholders that are specific to our dataset. We find that ownership structure is significant in explaining risk differences but mainly for privately owned banks. A higher equity stake of either individuals/families or banking institutions is associated with a decrease in asset risk and default risk. In addition, institutional investors and non-financial companies impose the riskiest strategies when they hold higher stakes. For publicly held banks, changes in ownership structure do not affect risk taking. Market forces seem to align the risk-taking behavior of publicly held banks, such that ownership structure is no longer a determinant in explaining risk differences. However, higher stakes of banking institutions in publicly held banks are associated with lower credit and default risk.