Bank capital, liquidity and risk in Ghana
| DOI | https://doi.org/10.1108/JFRC-12-2020-0117 |
| Published date | 24 October 2021 |
| Date | 24 October 2021 |
| Pages | 149-166 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Emmanuel Carsamer,Anthony Abbam,Yaw N. Queku |
Bank capital, liquidity and risk
in Ghana
Emmanuel Carsamer
Department of Economics Education, University of Education, Winneba,
Ghana and Department of Administration, Wiawso College of Education,
Western North, Ghana
Anthony Abbam
Department of Economics Education, University of Education,
Winneba, Ghana, and
Yaw N. Queku
Department of Accounting and Finance, Cape Coast Technical University,
Cape Coast, Ghana
Abstract
Purpose –Capital, risk and liquidity are the vitality of the banking industry, which can improve the efficiency
of banking and promote the efficiency of resource allocation. The purpose of this study is to examine how Basel III
new liquidity ratios affect bank capital and risk adjustments and how banks respond to the new liquidity rules.
Design/methodology/approach –The authors adopted the system generalized method of moments (GMM)
to examine how Basel III new liquidity ratios affect bank capital and risk adjustments and how banks respond to
the new liquidity rules. Based on the call reports data from banks, GMM was used to test the hypotheses that new
liquidity ratios affect bank capital and risk adjustments, as well as how banks respond to the regulation.
Findings –The results indicate banks targeted capital, risk and liquidity and simultaneously coordinate
short-term adjustments in capital and risk. New liquidity measures enable banks to coordinate risk and
liquidity decisions. Short-termadjustments in new liquidity rules inversely impact bank capital. Short-term
adjustments in new liquidity rules inversely impact bank capital and capital adjustments adversely affect
changesin the liquiditycoverage ratio (LCR).
Research limitations/implications –The primary results revealed that Ghanaian banks
simultaneously coordinate and target capital, risk exposure and liquidity level. Also, capital adjustments
positively influencerisk adjustments and vice versa while bidirectionalnegative coordination exists between
bank capital and risk on one hand and liquidity on the other hand. Short-termadjustments in new liquidity
rule inversely impactbank capital and capital adjustments adversely affectchanges in the LCR. The findings
partially confirm the theoretical predictions of Repullo (2005) regarding the negative links between capital,
risk and liquiditybut the authors have higher capital induceshigher risk.
Practical implications –Banks should balance off their targeted risk and liquidity in order not to
sacrificecapital accumulation for liquidity.
Originality/value –This researchoffers new contributions in the research of bank management of capital
and liquidity toward banks during a financial crisis from a theoretical perspective and trust management
from an applicativeperspective.
Keywords Basel III, Liquidity risk, Bank regulation, Ghana
Paper type Research paper
Introduction
Preserving liquidity is a dilemma for financial institutions as banks battle with a tradeoff
between profit and holding of liquidity (Goodhart, 2008). Liquidity is a capacity to find an
Bank capital,
liquidity and
risk
149
Received25 December 2020
Revised21 April 2021
14August 2021
Accepted20 September 2021
Journalof Financial Regulation
andCompliance
Vol.30 No. 2, 2022
pp. 149-166
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2020-0117
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
increase in assets and meet bothexpected and unexpected cash and collateral obligations at
minimum cost (Basel, 2006). It occurs when a bank cannot easily offset specific exposures
without significantly lowering market prices due to inadequate market depth and
disruptions, which usually have adverse effects on earnings and capital (Decker, 2000;
Drehmann and Nikolaou,2013). Financial intermediaries must ensure that theyhave enough
funds for future demands of providers and borrowers of funds at reasonable costs.
Therefore, the size of the liquiditybuffer should reflect the opportunity cost of holding liquid
assets compared to loans and liquidity risksto the banks. Liquidity regulation is needed to
enhance banks’resilience to liquidity shocks but because of market incompleteness,
financial markets under provide liquidity (Allen and Gale, 2017). Liquidity buffer allows
banks to buy time in crisis period by paying off some debt, which allows central banks to
make more informed liquiditydecisions (Santos and Suarez, 2019).
Banks in Ghana always put in place liquidity and capital policies to reduce credit and
operational risks yet the industryhas suffered from regulatory and supervisory rigidities as
evident by the severe financialstress, which necessitated central bank support.The
2017-2018 banking crisis in Ghana highlighted the critical importance of liquidity risk
management of financial institutions(Atuahene, 2019; PWC, 2018). Bank of Ghana (BoG) by
law, ensures liquidity, solvency, stablebanking system, capital adequacy and asset quality
(BoG, 2018). However, according to Atuahene (2019), BoG lacked sufficient independence
from the government to refuse emergency liquidity support to politically connected banks,
hence the inability to enforce the banking law and to deliver as expected. This has
contributed the financial distress and bank failure. One critical effect of the bank failure is
the inability of banks to meet depositors’withdrawals and losses, which contributed to
deposits lockup and subsequent bailed out by the government at the expense of the
taxpayers’resources. In advance to the banking turmoil, Ghana experienced astronomical
growth in banks number from about 12 to about40 but it has been reduced to 23 because of
the banking crisis and failure, as well as subsequent banking sector clean-up (Atuahene,
2019). Government interventionthrough bailout since 2017 is not to address only the risks in
the sector but also to increase depositor’sconfidence and access to deposits.
Similar to other banking regulators worldwide, BoG has aligned its regulations to the
Basel Committee framework to respond to weaknesses in the financial system. BoG has,
therefore, endorsed the BaselIII framework, which has introduced two regulatorymeasures,
namely, liquiditycoverage ratio (LCR) and net stable funding ratio (NSFR). The LCR focuses
on the short-term liquidity of banksand NSFR aims to monitor long term funding stability
of banks. The full impact of the new regulatory requirements on bank capital and risk
behavior is still at its infancy. Studies assessing the potential impact of the new regulatory
framework have not reached a consensus (Jiraporn et al.,2014;King, 2013;Yan et al.,2012).
Jiraporn et al. (2014) reported an inverse relationship betweenNSFR and banks risk taking
behavior but according to King (2013), implementing the regulatory framework adversely
affects the economy due to the shrinking of banks’balance sheets, and changes in the
composition of assets. However, higher regulatory capital requirements reduce likely
banking crisis and economic loss (Yan et al.,2012). Therefore, looking at the systemic failure
and massive reforms in the Ghanaian banking industry, this paper examines how Basel III
new liquidity ratios affect bank capital and risk adjustmentsand how banks respond to the
new liquidity rules.
The paper contributesto the current debate on the global banking reformprocess and the
banking literature. Moreover, jointly examining capital, risk and liquidity decisions of
Ghanaian banks is unique. The study might be the first to examine how banks coordinate
the Basel III new liquidity ratioswith capital and risk adjustments and how banks respond
JFRC
30,2
150
To continue reading
Request your trial