Impact of Ownership and Regulations on Bank Risk-taking and Performance in Emerging Economies: Evidence from the MENA Countries

This paper examines how ownership and bank regulations individually and interactively influence bank risk-taking and performance. We use generalised method of moments (GMM) method to investigate an unbalanced panel dataset on 1373 bank-year observations from 13 MENA countries covering 2001 to 2012. Our study results suggest that government ownership has a positive effect on default risk, which in turn has a negative effect on bank profitability. Apart from indirect effect through risk-taking, higher government ownership has a direct negative effect on bank profitability. We also find ownership concentration having an inverse association with bank risk. Interestingly, foreign ownership shows positive association with bank risk and negative association with profitability only in the pre-crisis period. However, foreign shareholding shows an opposite effect on risk-taking in the post-crisis period. Overall, the interaction variables show better explanatory powers than those of individual ownership and bank regulation variables. Our results show that the explanatory powers of some ownership variables are reversed or turned into statistically significant, if they have interactions with regulatory variables. However, we find capital stringency, supervisory power and overall bank regulations (both individually and interactively) having positive effects on bank risk and negative effects on profitability. We also find that the explanatory powers of these regulatory variables hold only among the post-2008 sub-sample. Whilst our evidence suggests that bank regulations constrain the power of the shareholders, it is also evident that the latter engages in high risk-taking strategies in order to compensate for the losses from stringent capital requirements and increased regulatory compliance. This evidence also confirms the significance of interdependence among institutional and internal corporate governance mechanisms in explaining risk-taking and performance of a bank.