Bank’s financial stability and risk management

This study aims to examine the effect of Saudi bank’s financial stability on risk management.

Different ordinary least square models have been used to study the significant effect of banks’ financial stability indicators on different types of risks in Saudi banks. Financial statements were collected of all Saudi banks (12 banks) from 2011 to 2014 from TADAWL website.

The results indicate a negative and significant effect of capital adequacy ratio on credit risk. Also, there is a significant and positive effect of leverage ratio on credit risk. Moreover, the results indicate negative and significant effect of provisions, leverage, ratio of loans to deposits and bank size on liquidity risk. Finally, results indicate a positive and significant effect of capital adequacy, provisions, leverage and asset utilization ratio on operational risk and indicate a negative and significant effect of loan-to-deposits ratio on operational risk. A robustness check was used to confirm the results. No differences between small and large Saudi banks was found. All banks are committed to apply Basel accord and Saudi Arabian Monetary Agency (SAMA) regulations. But there is a significant difference in applying SAMA toolkits regulations between 2011 and 2014. The 2014 results reflect very high degree of financial stability in Saudi banks when compared with that of 2011, also greater ability to mitigate risk exposure using different types of macroprudential toolkits stated by SAMA.

The study is limited to Saudi Banks from 2011 to 2014.

This is the first paper to use the macroprudential toolkits, suggested by SAMA as financial stability measurements, to examine their effect on different types of risks in Saudi banks. SAMA suggested this group of toolkits to comply with Basel III new regulations and to minimize the degree of risk exposure of Saudi banks.