International financial integration and bank stability in selected sub-saharan african countries: the moderating role of macroprudential regulation

Abstract

This study analyses the effect of international financial integration on banking sector stability in sub-Saharan Africa (SSA) and the moderating role played by macro-prudential regulations. The study employed system Generalised Methods of Moments (GMM) estimation approach on 28 SSA countries over 20-year period spanning from 2000-2020. The study found that international financial integration affects the financial stability of banks in the SSA region. In addition, the study found a significant contributing role of macroprudential regulations in the international financial integration–bank stability nexus of banks within the SSA region. Hence, tighter macroprudential regulations within the SSA region would best compliment the traditional monetary policies in curbing the adverse effects of financial sector instabilities. This study therefore recommends that, policy makers should consider implementing macroprudential measures, such as capital controls, reserve requirements, and limits on liquid assets to deposit short term funds and bank regulatory capital requirements, to manage the impact of cross-border financial transactions and aggregate international capital inflows on bank stability. These measures would help prevent excessive risk-taking and limit the build-up of systemic risks. Also, policy makers should establish robust monitoring and supervisory frameworks to oversee cross-border financial transactions and aggregate international capital inflows. This includes ensuring that banks adhere to international standards and best practices for risk management, including adequate capital buffers, effective risk assessment and monitoring, and compliance with relevant regulations and reporting requirements.