Funding liquidity risk and banks' risk-taking: Evidence from Islamic and conventional banks

Abstract

The purpose of this paper is to investigate the impact of funding liquidity risk on the risk-taking behaviour of Islamic and conventional banks. Using bank-level and country-level data from 18 countries over the period 2004–2016, we show that lower funding liquidity risk leads to higher risk-taking behaviour by banks, with this effect being less pronounced for Islamic banks. Additionally, large banks tend to engage in less risk-taking when faced with lower funding liquidity risk. Moreover, the evidence shows that, unexpectedly, banks faced with lower funding liquidity risk were more inclined to take risks during the 2008 global financial crisis.