The Impact of Changes in Basel Capital Requirements on the Resilience of African Commercial Banks
DOI:
https://doi.org/10.47743/saeb-2022-0001Keywords:
bank risk, Basel capital requirements, resilience, African Banks.Abstract
Focusing on a panel sample of 41 commercial banks over the period of 2000-2018, this study examined the effect of capital adequacy on the resilience of commercial banks in Africa under changing Basel levels (II, III, and the proposed Basel IV). The study created sample representative banks for the proposed Basel IV and used two measures, namely Z-score and CAMELS, to capture bank resilience. Using the panel logistic regression and fixed effect model, we found that capital adequacy, liquidity, earnings management efficiency, and macroeconomic conditions are key determinants of the resilience of commercial banks in Africa. Additionally, Basel compliant banks tend to be less prone to macroeconomic factors. Based on the positive and significant impact of all Basel capital ratios on Zscore, the results suggest that a high level of capital requirements increases African banks' resilience, and banks with higher capital can absorb risk exposures.
References
Abdel-Baki, M. (2012). Forecasting the Costs and Benefits of Implementing Basel III for North African Emerging Economies: An Application to Egypt and Tunisia. African Development Bank, Economic Brief, 1-40. Retrieved from https://www.afdb.org/en/news-and-events/forecasting-the-costs-and-benefits-of-implementing-basel-iii-for-north-african-emerging-economies-an-application-to-egypt-and-tunisia-9536
Adesina, K. S., & Mwamba, J. M. (2016). Do Basel III Higher Common Equity Capital Requirements Matter for Bank Risk‐taking Behaviour? Lessons from South Africa. African Development Review, 28(3), 319-331. http://dx.doi.org/10.1111/1467-8268.12208
Admati, A. R., DeMarzo, P. M., Hellwig, M. F., & Pfleiderer, P. C. (2013). Fallacies, irrelevant facts, and myths in the discussion of capital regulation: Why bank equity is not socially expensive. Max Planck Institute for Research on Collective Goods, 23, 1-77. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2349739
Allen, & Giovannetti. (2011). The effects of the financial crisis on Sub-Saharan Africa. Review of Development Finance, 1(1), 1-27. http://dx.doi.org/10.1016/j.rdf.2010.10.002
Altman, E. I., Iwanicz-Drozdowska, M., Laitinen, E. K., & Suvas, A. (2017). Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman's Z-Score Model. Journal of International Financial Management & Accounting, 28(2), 131-171. http://dx.doi.org/10.1111/jifm.12053
Altunbas, Y., Carbo, S., Gardener, E. P. M., & Molyneux, P. (2007). Examining the Relationships between Capital, Risk and Efficiency in European Banking. European Financial Management, 13(1), 49-70. http://dx.doi.org/10.1111/j.1468-036X.2006.00285.x
Banerjee, R., & Majumdar, S. (2017). Does Financial Regulation Influence Bank Efficiency? A Study on UAE Banking Sector. Paper presented at the International Conference on Applied Economics.
BCBS. (2009). Strengthening the resilience of the banking sector. Basel Committee on Banking Supervision. Retrieved from https://www.bis.org/publ/bcbs164.pdf
BCBS. (2017). Basel III: Finalising post-crisis reforms. Basel Committe on Banking Supervision, 1-162. Retrieved from https://www.bis.org/bcbs/publ/d424.htm
BCBS. (2020). Governors and Heads of Supervision announce deferral of Basel III implementation to increase operational capacity of banks and supervisors to respond to Covid-19. Basel Committee on Banking Supervision. Basel Committe on Banking Supervision. Retrieved from https://www.bis.org/press/p200327.htm
Benson, E. (2019). Bank Failure in Ghana: What Accounted for the Collapse of Unibank? (MBA), University of Ghana. Retrieved from http://ugspace.ug.edu.gh/handle/123456789/31637
Bichsel, R., & Blum, J. (2004). The relationship between risk and capital in Swiss commercial banks: A panel study. Applied Financial Economics, 14(8), 591-597. http://dx.doi.org/10.1080/0960310042000233881
Boateng, K. (2019). Credit Risk Management and Performance of Banks in Ghana: the ‘Camels’ Rating Model Approach. International Journal of Business and Management Invention (IJBMI) 8(02), 41-48.
Bonner, C., Streitz, D., & Wedow, M. (2016). On the differential impact of securitization on bank lending during the financial crisis. Working Paper No. 501. De Nederlandsche Bank NV, The Netherlands. DBN, 1-37. Retrieved from
Brei, M., & Gambacorta, L. (2014). The leverage ratio over the cycle. Bank for International Settlement, BIS Working Paper No 471, 1-39. Retrieved from https://www.bis.org/events/conf140909/brei_gambacorta_paper.pdf
Bui, C., Scheule, H., & Wu, E. (2017). The value of bank capital buffers in maintaining financial system resilience. Journal of Financial Stability, 33, 23-40. http://dx.doi.org/10.1016/j.jfs.2017.10.006
Chalermchatvichien, P., Jumreornvong, S., & Jiraporn, P. (2014). Basel III, capital stability, risk-taking, ownership: Evidence from Asia. Journal of Multinational Financial Management, 28, 28-46. http://dx.doi.org/10.1016/j.mulfin.2014.09.001
Chiaramonte, L., & Casu, B. (2017). Capital and liquidity ratios and financial distress. Evidence from the European banking industry. The British Accounting Review, 49(2), 138-161. http://dx.doi.org/10.1016/j.bar.2016.04.001
Chironga, M., Cunha, L., Grandis, H. D., & Kuyoro, M. (2018). African retail banking’s next growth frontier. Retrieved from Online: https://www.mckinsey.com/industries/financial-services/our-insights/african-retail-bankings-next-growth-frontier
Cohen, B. H., & Scatigna, M. (2016). Banks and capital requirements: channels of adjustment. Journal of Banking & Finance, 69, S56-S69. http://dx.doi.org/10.1016/j.jbankfin.2015.09.022
Gabriel, G. (2016). The impact of the basel 3 capital requirements on the performance of european banks. (Masters), University of Liège, Online. Retrieved from http://lib.ulg.ac.be
Gathaiya, R. (2017). Analysis of issues affecting collapsed banks in Kenya from year 2015 to 2016. International Journal of Management Business Studies, 7(3), 9-15.
Gehrig, T., & Iannino, M. C. (2021). Did the Basel Process of capital regulation enhance the resiliency of European banks? Journal of Financial Stability, 55, 1-25. http://dx.doi.org/10.1016/j.jfs.2021.100904
Geroski, P. A., & Jacquemin, A. (1988). The Persistence of Profits: A European Comparison. The Economic Journal, 98(391), 375-389. http://dx.doi.org/10.2307/2233373
Giordana, G. A., & Schumacher, I. (2017). An Empirical Study on the Impact of Basel III Standards on Banks’ Default Risk: The Case of Luxembourg. Journal of Risk and Financial Management, 10(2). http://dx.doi.org/10.3390/jrfm10020008
Gunsel, N. (2007). Financial ratios and the probabilistic prediction of bank failure in North Cyprus. European Journal of Scientific Research 18(2), 191-200.
Hossain, & Islam. (2017). Impact of Basel II & III Implementation to Mitigate Bank Risk: A Study on Al-Arafah Islami Bank Limited. Indian Journal of Finance and Banking, 1(2), 42-51. http://dx.doi.org/10.46281/ijfb.v1i2.88
Hossain, Khan, & Sadique. (2018). Basel III and perceived resilience of banks in the BRICS economies. Applied Economics, 50(19), 2133-2146. http://dx.doi.org/10.1080/00036846.2017.1391999
Kwan, S., & Eisenbeis, R. A. (1997). Bank Risk, Capitalization, and Operating Efficiency. Journal of Financial Services Research, 12(2), 117-131. http://dx.doi.org/10.1023/A:1007970618648
Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259-275. http://dx.doi.org/10.1016/j.jfineco.2008.09.003
Lepetit, L., & Strobel, F. (2015). Bank insolvency risk and Z-score measures: A refinement. Finance Research Letters, 13, 214-224. http://dx.doi.org/10.1016/j.frl.2015.01.001
Lindquist, K.-G. (2004). Banks’ buffer capital: how important is risk. Journal of International Money and Finance, 23(3), 493-513. http://dx.doi.org/10.1016/j.jimonfin.2004.01.006
Ljung, A., & Schennings, A. (2018). The impact of capital requirements on Swedish bank lending: A study on the effects of higher capital regulations. Lund University. Retrieved from http://lup.lub.lu.se/
Lotto, J. (2016). Efficiency of capital adequacy requirements in reducing Risk-Taking behavior of Tanzanian commercial banks. Research Journal of Finance Accounting, 7(22), 110-118.
Mamatzakis, & Bagntasarian. (2019). The nexus between underlying dynamics of bank capital buffer and performance. School of Business, Management and Economics, University of Sussex Business School, 1-57.
Mariathasan, M., & Merrouche, O. (2014). The manipulation of basel risk-weights. Journal of Financial Intermediation, 23(3), 300-321. http://dx.doi.org/10.1016/j.jfi.2014.04.004
Munir, B., Salwa, U., & Bustamam, A. (2017). Camel Ratio on Profitability Banking Performance (Malaysia Versus Indonesia). International Journal of Management, Innovation Entrepreneurial Research, 3(1), 30-39. http://dx.doi.org/10.18510/ijmier.2017.314
Nurazi, R., & Evans, M. (2005). An Indonesian study of the use of CAMEL(S) ratios as predictors of bank failure. Journal of Economic and Social Policy, 10(1), 1-6.
Oino, I. (2018). Impact of regulatory capital on European banks financial performance: A review of post global financial crisis. Research in International Business and Finance, 44, 309-318. http://dx.doi.org/10.1016/j.ribaf.2017.07.099
Oughton, C. (2017). A Financial Systems Resilience Index for South Africa: Joining the Twin Peaks. Paper presented at the Key issues for effective macroprudential policymaking.
Papadimitriou, T., Gogas, P., & Agrapetidou, A. (2020). The resilience of the U.S. banking system. International Journal of Finance & Economics, n/a(n/a). http://dx.doi.org/10.1002/ijfe.2300
Parrado, E. (2016). How can we make our banks more resilient? World Economic Forum. Retrieved from https://www.weforum.org/agenda/2016/04/how-can-we-make-our-banks-more-resilient/
Perrone, Ferreira, & Securato. (2015). Basel III: Impact on Banks in Brazil. Revista Contabilidade & Financas, 26(69), 345-361. http://dx.doi.org/10.1590/1808-057x201500720
Psillaki, M., & Georgoulea, E. (2016). The Impact of Basel III Indexes of Leverage and Liquidity CRDIV/CRR on Bank Performance: Evidence from Greek Banks. SPOUDAI Journal of Economics and Business, 66(1-2), 79-107.
Sahut, J.-M., & Mili, M. (2011). Determinants of Banking distress and Merger as strategic policy to resolve distress. Economic Modelling, 28(1), 138-146. http://dx.doi.org/10.1016/j.econmod.2010.09.017
Sanusi, L. (2010). Global financial meltdown and the reforms in the Nigerian banking sector Paper presented at the BIS Central Bankers' speeches, Convocation Square, Abubakar Tafawa Balewa University, Bauchi, Nigeria.
Stolz, S. (2002). The relationship between bank capital, risk-taking, and capital regulation: A review of the literature. Working Paper 1105. Kiel Institute for World Economics Retrieved from http://hdl.handle.net/10419/17759
Swamy, V. (2018). Basel III capital regulations and bank profitability. Review of Financial Economics, 36(4), 307-320. http://dx.doi.org/10.1002/rfe.1023
Tan, & Floros. (2013). Risk, capital and efficiency in Chinese banking. Journal of International Financial Markets, Institutions and Money, 26, 378-393. http://dx.doi.org/10.1016/j.intfin.2013.07.009
Tanda, A. (2015). The Effects of Bank Regulation on the Relationship Between Capital and Risk. Comparative Economic Studies, 57(1), 31-54. http://dx.doi.org/10.1057/ces.2014.35
Triki, T., Kouki, I., Dhaou, M. B., & Calice, P. (2017). Bank regulation and efficiency: What works for Africa? Research in International Business and Finance, 39, 183-205. http://dx.doi.org/10.1016/j.ribaf.2016.07.027
Walter. (2019). US Bank Capital Regulation: History and Changes Since the Financial Crisis. Economic Quarterly(1Q), 1-40.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2022 Damilola Oyetade, Adefemi A. Obalade, Paul-Francois Muzindutsi
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
All accepted papers are published on an Open Access basis.
The Open Access License is based on the Creative Commons license.
The non-commercial use of the article will be governed by the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License as currently displayed on https://creativecommons.org/licenses/by-nc-nd/4.0
Under the Creative Commons Attribution-NonCommercial-NoDerivatives license, the author(s) and users are free to share (copy, distribute and transmit the contribution) under the following conditions:
1. they must attribute the contribution in the manner specified by the author or licensor,
2. they may not use this contribution for commercial purposes,
3. they may not alter, transform, or build upon this work.
This work is licenced under a 
