The Relationship between CAMEL Rating Model, Financial Regulation and Financial Stability of Palestinian Commercial Banks: Moderating Effect of Interest Rate

The purpose of this study is to assess the moderation effect of interest rates on the relationship between the CAMEL rating model, financial regulation and the financial stability of commercial banks in Palestine for the period 2016-2022. The study design was utilized, and a census of 13 commercial banks in Palestine was undertaken for the period 2016–2022. Information asymmetry theory and liquidity shift ability were utilized. Two regression analyses have been used to test the research hypotheses. A causal research design was applied, panel data was utilized and consequently, the study applied a panel regression model. The findings of this study show that the interest rate insignificantly moderated the nexus between CAMEL rating variables, financial regulation and financial stability, with the exception of asset quality. The interest rate only moderated asset quality and the financial stability nexus significantly. The findings of this study suggest some policy implications, such as that the Palestine Monetary Authority, as the central bank of Palestine, should set an interest rate in view of the prevailing economic situation. The study further puts forward the recommendation that commercial banks should strive towards reducing non-performing loans, which can be done through the setting up of effective credit risk management systems. This study contributes to body of knowledge by elucidating the significance of interest rates in the link between the CAMEL rating model, financial regulation and financial stability in commercial banks. In the context of the Palestinian banking sector, this study offers new insights into the kind of general interest rate moderating influence on the connection between the CAMEL rating model, financial regulation and financial stability among Palestinian commercial banks. It will motivate subsequent scholars to investigate the primary aspects of the correlation between interest rates and financial stability in greater depth through Palestine’s banking industry.

 

Keywords: Banking Sector, Camel Rating Model, Commercial Banks, Financial Regulation, Financial Stability, Interest Rate.

 

JEL Classification E43, G21, G24, G28.