The drivers of liquidity risk in the GCC dual banking sector: the impact of the bank’s business model

Purpose Considering the influence of the bank’s business model, this study aims to explore the drivers of liquidity risk in the dual banking sector of the Gulf Cooperation Council (GCC) using the two new liquidity requirements of Basel III, Net Stable Funding Ratio and Liquidity Coverage Ratio, as indicators of liquidity risk. Design/methodology/approach For 61 GCC banks between 2018 and 2022, this study applies the random effects model with an interaction dummy variable technique. Findings Islamic banks in the GCC region tend to have a significantly lower level of Basel III liquidity requirements, meaning that they are struggling to meet the new Basel III liquidity requirements as they lack an adequate liquidity risk management framework. The liquidity of GCC banks decreases with size; this relationship is linear for conventional GCC banks but not linear for Islamic banks. Finally, the COVID-19 epidemic has exacerbated liquidity risk for GCC banks, with Islamic banks appearing to be the most impacted. The findings are robust to alternative variable selections and estimation techniques. Practical implications The findings provide useful insights to improve liquidity risk management practices in the GCC banking system, especially for Islamic banks. Targeted reforms may be needed to further develop Islamic banks’ liquidity tools and optimize their ability to withstand macroeconomic and systemic shocks. Originality/value To the best of the author’s knowledge, no single study considers the new Basel III metrics for bank liquidity or explicitly compares a wide range of liquidity factors for conventional and Islamic banks in the GCC region.