Abstract
Stimulating competition in the bank system without compromising the stability constitutes a major puzzle that bank regulators and practitioners face. Hitherto, empirical studies focusing on Sub-Saharan Africa in addressing these issues for the anticipated regional integration and sustainable growth are rare. This study applied structural equation modelling to simultaneously analyze competition, regulation and stability in a panel of 440 Sub-Saharan African commercial banks over the period from 2006 to 2015. The results provided evidence that competition affects stability via efficiency and that regulation affects stability via competition and efficiency. This study produced critical theoretical and methodological insights with substantial implications for the conduct of bank regulatory policy.
Highlights
A healthy interplay of competition, regulation and stability is key to managing a bank system that impacts the development of an economy
Competition is good in a bank system because of its potential to lead to efficient banks that could ameliorate some these problems (Casu, Girardone, & Molyneux, 2015), if not managed properly, it could result in financial system instability
The essence of this study was to explore the interplay among competition, regulation and stability to enable us to propose a model that could assist policy makers to deal with the issues of stimulating competition without compromising stability in the banking sector
Summary
A healthy interplay of competition, regulation and stability is key to managing a bank system that impacts the development of an economy. We summarized the relationship in the reduced form of SEM model following Chang, Lee, and Lee (2009) and Mueller (1999) as follows: Y= BY + ΓX + α + ξ , where Y represents (NY × 1) column vector of endogenous variables, competition, efficiency and stability, X is a (NX × 1) column vector of exogenous variables, regulation (capital, liquidity and assets quality regulations), B
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