THE IMPACT OF OIL PRICES ON THE BANKING SYSTEM IN THE GULF COOPERATION COUNCIL

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Abstract

This paper examines the links between global oil price movements and macroeconomic and financial developments in the Gulf Cooperation Council (GCC). The GCC economies can be adversely affected by low oil prices due to their high dependence on oil and gas exports and macro-financial linkages which can amplify the effects of oil price movements over the financial cycle. Historically, systemic financial sector risks rose in the GCC countries with the oil price upswing in the years before the global financial crisis. Against this background, a range of multivariate panel approaches, including a panel vector autoregression approach, were applied to macroeconomic and bank-level data covering the six GCC economies and span 1999–2014. The paper finds strong empirical evidence of feedback loops between oil price movements, bank balance sheets, and asset prices. Empirical evidence also suggests that bank capital and provisioning have behaved countercyclically through the cycle. That is, these ratios increase during good times. This has helped strengthen the resilience of the financial system to the oil price decline since mid-2014.

Keywords: Banking System, Counter-Cyclical Provisions, Macro-Financial Linkages, Nonperforming Loans, Oil Prices, Panel Vector Autoregression

Received: 04.04.2017

Accepted: 21.05.2017

How to cite this paper: Khandelwal, P., Miyajima, K., & Santos, A. (2017). The impact of oil prices on the banking system in the Gulf Cooperation Council. Journal of Governance & Regulation, 6(2), 32-47. https://doi.org/10.22495/jgr_v6_i2_p4