The Effect of Competition and Banking Regulation on Systemic Risk : Evidence from Dual Banking Systems

This paper examines the effect of competition and banking regulation on the systemic risk of Islamic Banks (IBs) and Conventional Banks (CBs). Using an unbalanced panel data comprising 80 IBs and 204 CBs from 17 emerging market countries from 2000 to 2019, the results show that higher competition tends to reduce systemic risk exposure, with no differential impact between IBs and CBs. Moreover, larger banks exhibit higher systemic risk. Furthermore, we show that banks with greater market power after the 2008 financial crisis exhibit increased exposure to systemic risk. Finally, the evidence shows that systemic risk is higher in countries with lower activity restrictions, stricter capital stringency, weaker supervisory power, and higher diversification indices