Sovereign debt and financial sector nexus in the MENA region

Purpose This study aims to investigate the impact of bank claims on government on the stability of banking sectors in the Middle East and North Africa (MENA) region, in addition to several banking sector-specific characteristics and macroeconomic and institutional variables. The study’s purpose to provide a comprehensive understanding of how exposure to sovereign debt impacts bank stability and the possible prevalence of the sovereign debt-bank stability nexus in the MENA banking sectors. Design/methodology/approach This study adopts system generalized method of moments on a data set of 20 MENA banking sectors over the period 2000–2021. Bank stability is measured by Z-score and NPL ratios. In parallel, bank exposure to sovereign debt is proxied by banking sector’s total claims on government as a percentage of the sector’s total assets and as percentage of GDP. Findings The study’s key findings reveal that bank claims on government have constructive impact on banking stability. In contrast to the sovereign debt-bank stability nexus hypothesis, these claims do not negatively affect stability in the MENA region. Indeed, this finding challenges the conventional theoretical assumptions. Originality/value This study makes a significant contribution by focusing on the relationship between bank claims on government and bank stability within the MENA region. The MENA region is characterised by unique financial systems, where banks hold substantial government debt, making it an ideal case for examining the sovereign debt-banking stability nexus. Unlike previous studies that predominantly emphasise the destabilising effects of sovereign debt exposure, this paper reveals that such exposures improve bank stability in the MENA context.