Basel Compliance and Financial Stability: Evidence from Islamic Banks

We find that compliance with the Basel Core Principles (BCPs) has a strong positive effect on the stability of conventional banks, and a positive but less pronounced effect on the stability of Islamic banks. We also find that the main impact of compliance is an increase in capital ratios, whereas other components of the Z-score are negatively affected. This reflects the desire of banks to be more closely integrated into the global financial system by holding higher capital ratios. The findings also justify the 2015 decision of the Islamic Financial Services Board to publish similar principles for Islamic banks.

Automated summary

Compliance with the Basel Core Principles has a strong positive effect on the stability of conventional banks, with a less pronounced effect on Islamic banks. The main impact of compliance is an increase in capital ratios, while other components of the Z-score are negatively affected. This reflects banks' desire to be more closely integrated into the global financial system.