Risk, capital and financial crisis: Evidence for GCC banks

Employing data on over 100 GCC banks for 1996-2011, we test the relation between risk and capital. Given the interlinkage between these two variables, the model employs a 3SLS estimation that takes on board this simultaneity. Consistent with the literature, risk is measured by the Z-score, while capital is computed as the ratio of equity to asset. The findings indicate that banks generally increase capital in response to an increase in risk, and not vice versa. Second, there is an uneven impact of regulatory pressure and market discipline on banks attitude toward risk and capital. Additionally, Islamic banks increased their capital as compared to conventional banks. Besides, the evidence testifies to the fact that banks with higher dependence on wholesale funds and less diversified income profile have higher risk.