Thefindings showed that the relationship betweenfinancial fragility indicators and macroeconomics in Malaysia has a significant and insignificant relationship. The result from all hypotheses testing revealed that government bond spreads and stock returns asfinancial fragility indicators rejected the null hypothesis which indicates that there is a relationship between government bond spreads and stock returns with all macroeconomic variables. Meanwhile, corporate bond spreads failed to reject the null hypothesis for hypotheses one, two, and four which indicates that there is no relationship between corporate bond spreads and macroeconomic variables except for inflation rate.
As can be concluded in this study, the performance of government bond spreads as a measurement of the probability of default and stock returns as a measurement of profitability in financial fragility indicators have a better predictor power for financial fragility than the performance of corporate bond spreads in Malaysia.
Interestingly, these results are in line with the definition given in this study where the probability of default increases and profitability decreases, and it indicates that the economy is more financially fragile, and GDP as a proxy of the economic condition will fall. Ourfindings support Minsky’sfinancial instability hypothesis.
When the expectation of the possibility of default decreases and creditors are willing to offer lower borrowing rates even though debtors invest in riskier projects, it allows financial institutions to increase leverage and invest in riskier assets leading to higher default and making the economic system more vulnerable.
This paper suggests that more studies be conducted in the future on predicting thefinancial fragility in Malaysia. Few studies have investigatedfinancial fragility in Malaysia. Hence, this paper recommends that future researchers investigate financial fragility to help the policymakers as well as the practitioners in Malaysia to be well prepared for any consequences of vulnerability in the economy.
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15 Predicting the Financial Fragility in Malaysia 167
Measuring Bank Stability: A Comparative Analysis Between Islamic
and Conventional Banks in Malaysia
Norzitah Abdul Karim, Syed Musa Syed Jaafar Alhabshi, Salina Kassim and Razali Haron
ABSTRACT The present study provides new empirical evidence of bank stability measures for 50 banks in Malaysia, for a period from 1999 to 2015. There are two methods of measuring bank stability that is using Z-score and CAMELS variables.
After calculating, these variables are ranked, with the highest average is ranked as one, and the lowest average is ranked last, orfifty. This is following the method by (Roman and Procedia Economics and Finance,6(13), 703–712 Roman and Şargu 2013) and (Procedia—Social and Behavioral Sciences,24, 1530–1545 Dincer et al.
2011) and extending it by introducing the average of total ranking for all variables.
The empiricalfindings suggest that both local Islamic and conventional banks are ranked favourable in overall average bank stability score, sensitivity to market risk, asset quality, earning and profitability, but local conventional banks are recorded favourable ranking in liquidity. Comparing the two types of local banks, conven- tional banks are ranked better in liquidity, sensitivity to market risk and earning and profitability.
Keywords Bank stability
Z-scoreCAMELS RankingN.A. Karim (&)
Universiti Teknologi MARA, IIUM Institute of Islamic Banking and Finance (IIiBF), International Islamic University, Kuala Lumpur, Malaysia
e-mail: [email protected] S.M.S.J. AlhabshiS. KassimR. Haron
IIUM Institute of Islamic Banking and Finance (IIiBF), International Islamic University, Kuala Lumpur, Malaysia
e-mail: [email protected] S. Kassim
e-mail: [email protected] R. Haron
e-mail: [email protected]
©Springer Nature Singapore Pte Ltd. 2018
F. Noordin et al. (eds.),Proceedings of the 2nd Advances in Business Research International Conference, https://doi.org/10.1007/978-981-10-6053-3_16
169