Banking Regulation Effects on African Banks’ Stability

Abstract

The 2008/2009 global financial crisis exposed the fragility of banking regulations, specifically the Basel II Accord in protecting banks from financial failure. As a result of this, the Basel III Accord came to bear. Banks’ stability promotes the confidence of stakeholders which is one of the major aims of the global Basel III banking regulations. Despite this, there is limited adoption of this Accord and scant evidence of the effect of Basel III regulations on banks’ stability within the African context. This study aims to determine whether the Basel III regulatory requirements at a multi-component level have an impact on the stability of African banks. The study employed the pooled ordinary least square estimator to fit the static panel data model established for the study. Panel data from 45 banks in six African countries were used. The findings revealed that in contrast to the popular expectation of the Basel III Accord, the minimum capital requirement, capital adequacy ratio, and capital buffer premium had a negative and insignificant relationship with the stability of banks within the African context whilst the liquidity coverage ratio stood out significantly with a positive effect on the banks’ stability. Based on these findings, the study recommends that African Bank regulators and CEOs should maintain a liquidity coverage ratio that is within the Basel III threshold and increase their current minimum capital requirement above the average of 13.59% to maintain stability and boost stakeholders’ confidence.