Interbank Connections, Bank Risk and Returns

Abstract

Abstract Using data on MENA country-banks, we study how interbank connections affect bank risk and returns. The findings indicate that interbank connections are determinantal to bank stability in the MENA region during periods of crisis, supportive of contagion effects. There is also a dampening impact on profitability. Over and above, the evidence for Islamic banks is supportive of contagion effects during the crisis, although their profitability is higher as well. Furthermore, macroprudential policies appear to exert a salutary impact on bank behavior, although this impact differs across the response variable: being effective for credit exposures with profits as the outcome and for funding exposure when non-performing loan ratio is the outcome variable.