Title: Fair value and financial instability: comparative study between Islamic and conventional banks
Authors: Leila Gharbi; Khamoussi Halioui
Addresses: Faculty of Economics Sciences and Management, Department of Accounting, University of Sfax, Tunisia ' Department of Accounting, College of Economics and Administrative Sciences, Islamic University of Imam Muhammed, Riyadh, Saudi Arabia
Abstract: In Gulf Cooperation Council countries, Islamic banks operate side-by-side with conventional banks. Both their operations are based on their own principles and frameworks although some regulations might overlap with each other. This study aims to explore the impact of fair value accounting on financial instability for both types of banks during the period 2003-2011. The paper discusses whether fair value affects capital adequacy ratio and risk-taking behaviour of Islamic and conventional banks in the same way. The findings prove that regulatory capital of Islamic banks is less affected by fair value changes than conventional ones. However, they behave similarly with regard to the risk associated with fair value measurement. Only three-stage least squares (3SLS) estimation showed positive and significant impact of fair value changes on risk-taking behaviour for the full sample and Islamic banks, but not for conventional banks.
Keywords: fair value accounting; unrealised gain and loss; capital adequacy ratio; risk-weighted assets; financial instability; Islamic banks; Islamic finance; conventional banks; banking industry; Gulf Cooperation Council; GCC countries; regulatory capital; risk-taking behaviour.
International Journal of Behavioural Accounting and Finance, 2014 Vol.4 No.3, pp.221 - 244
Received: 23 Nov 2012
Accepted: 05 Oct 2013
Published online: 30 Apr 2015 *