Basel requirement and financial stability: An analysis among Islamic and conventional banks in selected Asian countries

To prevent financial crisis lead by unstable bank which has dangerous contagion effect to the economy, bank regulations is established and updated gradually. Basel Accord, as an internationally renown and accepted bank regulation, formulated and reviewed by Bank for International Settlement (BIS) to ensure financial stability. Despite the latest Basel Accord (Basel III) established to replaced Basel I and II, the effectiveness of Basel in preventing financial crisis through maintaining bank stability remains challenged. With new set of requirements under Basel III: more stringent capital ratio, the introduction of liquidity and leverage requirement are being tested with regards their impacts on financial stability of banks. At the same time, Islamic banks, although its particularities are not specified under Basel III, were perceived to be more stable and resistance during financial shocks. Therefore, this study identifies the association of Islamic banks existence on stability of the banking system. Further, it also tries to compare the impact of new requirements on financial stability of both Islamic and conventional banks