The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region

Abstract

The global financial crisis has induced a series of failures of most conventional banks. This study investigates the main sources of banking fragility. We use a sample of 49 banks operating in the MENA region over the period 2006–2013 to analyze the relationship between credit risk and liquidity risk and its impact on bank stability. Our results show that credit risk and liquidity risk do not have an economically meaningful reciprocal contemporaneous or time-lagged relationship. However, both risks separately influence bank stability and their interaction contributes to bank instability. These findings provide bank managers with more understanding of bank risk and serve as an underpinning for recent regulatory efforts aimed at strengthening the joint risk management of liquidity and credit risks. Keywords: Credit risk, Liquidity risk, Bank stability, MENA region, JEL Classification: F3, G21, O16, 053