A Structural Model of "Alpha" for the Capital Adequacy Ratios of Islamic Banks

Baldwin, Kenneth; AlHalboni, Maryam; Helmi, Mohamad Husam

doi:10.1016/j.intfin.2018.12.015

A Structural Model of "Alpha" for the Capital Adequacy Ratios of Islamic Banks

Baldwin, Kenneth; AlHalboni, Maryam; Helmi, Mohamad Husam

Authors

Kenneth Baldwin

Maryam AlHalboni

Mohamad Husam Helmi

Abstract

The denominator of the capital adequacy ratio (CAR) for Islamic banks includes an adjustment factor, alpha, arising from the subsidisation of investment account holders’ returns using bank equity. The methodology established by the risk management standard-setting body for Islamic banks, the IFSB, estimates an alpha for each country using panel-data and normally distributed asset returns for its credit institutions. Consequently, the IFSB methodology precludes bank-specific alphas linked to the actual risk profile of underlying assets. There is also no discernible mapping between alpha and a bank’s own propensity to subsidise cash returns. This paper instead develops a new theoretical model for bank-specific alpha that is estimated for 43 Islamic banks in 11 countries. Our alpha values broadly correspond with those of the IFSB. However, a form of regulatory arbitrage is shown to exist which favors banks with relatively high alphas. This finding also has policy implications for bank efficiency and systemic risk.

Citation

Baldwin, K., AlHalboni, M., & Helmi, M. H. (2019). A Structural Model of "Alpha" for the Capital Adequacy Ratios of Islamic Banks. Journal of International Financial Markets, Institutions and Money, 60, 267-283. https://doi.org/10.1016/j.intfin.2018.12.015

Journal Article Type	Article
Acceptance Date	Dec 26, 2018
Online Publication Date	Dec 28, 2018
Publication Date	May 31, 2019
Deposit Date	Apr 12, 2019
Publicly Available Date	Dec 28, 2019
Journal	Journal of International Financial Markets, Institutions and Money
Print ISSN	1042-4431
Publisher	Elsevier
Peer Reviewed	Peer Reviewed
Volume	60
Pages	267-283
DOI	https://doi.org/10.1016/j.intfin.2018.12.015
Public URL	https://durham-repository.worktribe.com/output/1303928

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http://creativecommons.org/licenses/by-nc-nd/4.0/

Copyright Statement
© 2019 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/