Financial Market Development and Bank Risk in GCC Countries

Abstract

Financial market development is considered vital for innovation and economic growth. However, it may affect bank risk-taking as banks’ involvement in financial markets increases market and credit risks. In this study, we examine the impact of financial market development on bank risk in the Gulf Cooperation Council (GCC) member countries. We collect data from 120 GCC banks from 2012 through 2022. We represent financial development through stock market development and banking sector development, as well as bank risk through capitalization and income diversification. Our results suggest that increased financial development increases bank risk, which is valid for both stock market and banking sector development. However, neither measure of financial development has any impact on income diversification. Our results have implications for bank managers, policymakers, regulators, and stakeholders who are interested in the financial stability of GCC countries.