Regulatory Capital Requirement, Institutions And Bank Stability In Sub-Saharan Africa

Abstract

Regulatory capital is a current topic in the discourse on bank stability, especially within homogeneous financial systems. However, the regulatory capital-stability nexus cannot be examined in isolation from the prevailing institutional context. This study, therefore, employs a balanced panel of 25 countries from 2007 to 2017 to examine the role of regulatory capital in bank stability, highlighting the conditioning effect of institutional quality and regulatory capital type on the capital-stability nexus in sub-Saharan Africa. Using the Dynamic Panel Threshold Methodology (DPTM) developed by Seo and Shin (2016), this study also identifies the threshold effect of risk-based and non-risk-based regulatory capital on bank stability. The results indicate that while risk-based regulatory capital reduces bank stability, non-risk-based improves bank soundness, particularly in the case of the z-score. In the case of the NPL, both types of regulatory capital improve bank stability. Furthermore, the results reveal that institutional quality enforces a positive effect of both risk-based and non-risk-based regulatory capital on bank stability in the case of the z-score, but it has negative or no implications in the case of the NPL. This suggests a complementary effect in the case of the former and a substitutionary effect in the case of the latter. Finally, the results reveal the existence of a non-risk-based regulatory capital threshold level of 11-13% and a risk-based regulatory capital threshold level of 15-22%. The study thus suggests advancing institutions to minimize their negative impact on stability and the strict implementation of capital regulations that recognize regulatory types and their thresholds.