In emerging and developing economies, the challenge of balancing an effective taxation system with sustainable economic growth goals is particularly pronounced due to issues such as crowding out from jurisdictions policies and the behaviour of banks in response to taxation. These countries, with underdeveloped financial systems, often face poor tax policies and inconsistent regulations. The interplay between government taxation and banks’ pursuit of profitability can exacerbate inefficiencies, especially when banks adjust their behavior in ways that restrict private sector credit availability and undermine overall economic stability.

This study examines the effects of bank taxation on profitability in emerging and developing economies, focusing on corporate income tax (CIT) and cash reserve requirements (CRR) as forms of direct and indirect taxation. We employed a panel dataset of over 3,714 banks from 128 countries across Asia, Africa, South and Central America, and Eastern Europe. We obtained 15 years (2009-2023) unconsolidated financial data of all types of banks from Orbis Bank Focus. The research employs the Arellano-Bond system Generalized Method of Moments (GMM) to address endogeneity and autocorrelation.

The findings reveal that corporate income tax rates enhance banks’ profitability, as measured by Return on Assets (ROA) and Return on Equity (ROE). This occurs as banks increase investments in government bonds and securities, reduce lending to business borrowers, and pass approximately 90.34% of the tax burden onto customers through higher lending rates, while deposit rates remain unaffected. Conversely, cash reserve requirements negatively impact profitability across all measures (ROA, ROE, NIM, and Tobin’s Q) by restricting the funds available for lending. Banks’ preference for government bonds and securities—due to their low risk and tax advantages—further reduces the supply of credit to businesses. Additionally, the pass-through effects of taxation lead banks to raise lending rates, making loans more expensive. Reduced loanable funds due to crowding-out effects, combined with higher interest rates from decreased private sector lending and tax pass-through effects, increase borrowing costs. This, in turn, limits private sector investment, restricts credit availability for SMEs and startups, and hampers overall economic growth. As a result, economic inefficiencies intensify, exacerbating financial inequities in developing countries. This study also controls for key bank-specific and macroeconomic factors, including bank size, capital adequacy, asset quality, management efficiency, liquidity, GDP growth, inflation, regulatory quality, government effectiveness, real interest rates, and official exchange rates.

Robustness tests, including the Correlated Random Effects (CRE) model and subsample analyses by bank size and region, confirm the reliability of the findings. The study also incorporates tax sensitivity and comparative analyses, and Oster omitted bias estimation enhancing the robustness of the results.

This research contributes to the literature by addressing an intersection of corporate income tax with investments and securities and lending volume, introducing CRR as an indirect form of taxation, and measuring effect of bank taxation on external profitability aspect using Tobin’s Q. Given these findings, policymakers must carefully design tax policies that balance revenue generation with financial stability, ensuring that taxation does not inadvertently exacerbate credit constraints or economic inefficiencies. The study recommends considering taxation on banks’ income from investments in bonds and securities, and tax incentives on loans to SMEs to mitigate the crowding-out effect while promoting economic growth, stability and private sector lending.

Operational risk management plays a key role in safeguarding stability and resilience of Islamic financial institutions (IFIs) especially during the fast-digital transformation and growing expectation on regulatory oversight. This paper investigates the transition from the Operational Risk Integrated Online Network (ORION) to the Operational Risk Reporting (ORR) system imposed by Bank Negara Malaysia to financial institutions. Our literature search identifies the following key issues examined in prior studies namely, financial risk disclosure, regulatory compliance, and governance structures. To achieve the research objective, this study employed a qualitative document-based analytical approach. Our analysis is directed towards operational risk classification, fraud detection, cybersecurity incident reporting, and Shariah Non-Compliance Risk (SNCR) governance of both regimes. The paper also investigates the potential impact to the Malaysian financial sector from ORR's conformity with Basel III. Our content analysis found that the real-time reporting of fraud, cybersecurity breaches, and SNCR events in ORR would significantly improves operational risk management. The ORR apply more strict governance rules by assigning greater responsibility to the board of directors and Chief Risk Officer (CRO) and significantly change the ORION’s flexible and responsive risk reporting system to stricter reporting deadlines that forced financial institutions to disclose major losses within two days and major events in one day. The benchmarking analysis with Basel III reveals obvious variations in regulatory focus where, ORR primarily focus on operational risk management whereas Basel III promotes capital sufficiency as a cushion against operational losses. Ultimately, the advantages from adopting ORR comes with higher costs like greater regulatory monitoring, technological adaption, and higher compliance costs. The study suggests that concurrent adoption ORR and Basel III provide a more complete strategy for operational risk control.

Despite the significance of financial stability of banks, little is known for Islamic banks. Understanding how these institutions maintain the required stability helps in identifying the areas of improvements to support their resilience. Our paper examines whether the financial risks-credit, liquidity, capital, and operational-influence the Islamic banks differently for conventional banks. We collect data of 1,046 banks across 54 countries between 2009-2023. We find that Islamic banks are more sensitive to capital risk, while conventional banks show largely susceptible to credit and liquidity risk. The result for operational risks is mixed, suggesting no significant difference between Islamic and conventional banks.

This paper examines how microprudential policy affects income inequality, and whether and how the effect of macroprudential policy on income inequality depends on the stance of microprudential policy. Applying the system GMM method on a dataset covering 70 countries over a period of almost two decades, the analysis provides evidence that tighter microprudential policy leads to a reduction in income inequality as measured by the Gini coefficient. Nonetheless, the effect of an overall tightening of microprudential policy disappears in countries with low levels of economic development. Among the inspected individual microprudential policies, the power and independence of supervisory authorities have the greatest effect on income inequality. In addition, the results suggest that macroprudential policy tightening is effective in reducing income inequality under a strong microprudential policy framework, while the effect is reversed under a weak microprudential policy regime. This paper contributes to the growing literature on the spillover effects of banking regulation and supervision and on the relationship between financial sector policies and income inequality.