[Empirical Analysis of Post-2009 Crisis Interventions on the Stability of Banks]

Abstract

This paper investigates the behavior of assisted UAE banks four years after specific government intervention programs that were applied to them in 2009-10 using panel corrected standard error (PCSE) model estimation and artificial neural network (ANN). The study results demonstrate that government interventions in the UAE banking sector in 2009 crisis negatively affected banking sector stability in the long-run. The economic significance of these effects is that government intervention is found to decrease a bank’s stability (increase riskiness) in the range of almost 14% to 37%, because of reduced market discipline and less efficient banking structure. The coefficient for banks’ credit activities is negatively related with bank stability, which implies that banks with higher proportions of loans in their portfolio face lower stability and a higher risk level. This is supported by the fact that, (though statistically less significant), banks that are less efficient (ER) tend to engage in riskier activities thus reducing banks’ stability. ANN was found to be superior to PCSE analysis in predicting Stability (riskiness) of the UAE banks post-bailout in terms of correct classification percentage lowest RMSE, AIC in holdout sample, and key factors of importance identified in ANN that were not significant in PCSE. The methodological implication is that ANN study results can also be used by decision makers and policy makers to prioritize different factors to adjust the weight of these factors in their policy strategies. \nIndex of Acronyms \nADSE Abu Dhabi Security Exchange \nAED Arab Emirate Dirham \nAI Artificial Intelligence \nANN Artificial neural network \nCAGR Compound annual growth rate \nCDs Certificates of Deposit \nCVH Charter value hypothesis \nDFM Dubai Financial Market \nDiD Difference in difference \nDIFC Dubai International Financial Centre \nETF Exchange-traded funds \nGDP Gross Domestic Product \nHHITA Concentration measure - Herfindahl Index - Total Assets \nIMF International Monetary Fund \nLLP/R Loan loss provisions/reserves \nMSTA Market share to Total Assets \nOECD Organization of Economic Cooperation & Development \nPCSE Panel corrected standard error \nRBS Royal Bank of Scotland \nROA Return on Assets \nROE Return on Equity \nSCP Structure, Conduct and Performance \nSWFs Sovereign Wealth Funds \nUAE United Arab Emirates \nY-o-Y Year on Year \nσ Standard deviation