Oil Prices and Competition-Stability in the Banking Sector : Evidence from GCC Countries

We propose a model where the bank competition–stability/fragility relationship depends on the state of the real economy. We empirically test how the said relationship is influenced by oil prices which are crucial for the economies of the six Gulf countries. We find that high oil prices have an increasingly adverse effect on the competition-stability relationship. Specifically, from a threshold of about 65 U.S. dollars per barrel of oil, high competition leads to a more fragile banking system. Low oil prices have no significant impact on the competition-stability relationship. The analysis suggests careful consideration of the timing of pursuing competitionenhancing policies in banking. The good state of the economy is not the appropriate time to conduct such policies since more competition can be harmful to the stability of the banking system. The best time to promote banking competition is the low state of the economy. Practically, these findings reveal important implications for the growing GCC banking markets in light of the 2030 economic strategy aimed at diversification away from oil to services. During periods of high oil prices where the GCC economies are flourishing, careful monitoring of the competition level and M&A approvals are of advantage