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Constructing a banking fragility index for Islamic banks: definition impact on the predictive power of an early warning system

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  • Ayşegül Aytaç Emin
  • Başak Dalgıç
  • Tawfik Azrak

Abstract

This study aims to construct a banking sector fragility index for Islamic banks that gives substantial predictive power results. We develop various banking sector fragility indices using different combinations of proxies for credit, liquidity and market risk factors. Apart from the existing literature, we add profitability risk factor into fragility indices. Our results show that the predictive power of an Early Warning System (EWS) is highly sensitive to the proxies and combinations of the risk factors and, profitability risk has a positive impact on the predictive power results for Islamic banks.

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  • Ayşegül Aytaç Emin & Başak Dalgıç & Tawfik Azrak, 2021. "Constructing a banking fragility index for Islamic banks: definition impact on the predictive power of an early warning system," Applied Economics Letters, Taylor & Francis Journals, vol. 28(18), pages 1589-1593, October.
    • Handle: RePEc:taf:apeclt:v:28:y:2021:i:18:p:1589-1593
    DOI: 10.1080/13504851.2020.1834497
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    2. Alimshan Faizulayev & Eralp Bektas & Abdul Ghafar Ismail, 2020. "Profitability and persistency in the service industry: the case of QISMUT+3," The Service Industries Journal, Taylor & Francis Journals, vol. 40(3-4), pages 290-314, March.
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    6. Davis, E. Philip & Karim, Dilruba, 2008. "Comparing early warning systems for banking crises," Journal of Financial Stability, Elsevier, vol. 4(2), pages 89-120, June.
    7. Filippopoulou, Chryssanthi & Galariotis, Emilios & Spyrou, Spyros, 2020. "An early warning system for predicting systemic banking crises in the Eurozone: A logit regression approach," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 344-363.
    8. Demirguc-Kunt, Asli & Detragiache, Enrica, 1997. "The determinants of banking crises : evidence from industrial and developing countries," Policy Research Working Paper Series 1828, The World Bank.
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    1. Vodová,Pavla Klepková & PaleÄ ková,Iveta & Stavárek,Daniel, 2023. "Banking Stability and Financial Conglomerates in European Emerging Countries," Cambridge Books, Cambridge University Press, number 9781009095112, January.

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