Banking industry stability and investment dynamics
| DOI | https://doi.org/10.1108/JFRC-06-2021-0049 |
| Published date | 30 November 2021 |
| Date | 30 November 2021 |
| Pages | 215-239 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Rexford Abaidoo,Elvis Kwame Agyapong |
Banking industry stability and
investment dynamics
Rexford Abaidoo
Department of Business Management and Accounting,
University of Maryland Eastern Shore, Princess Anne, Maryland, USA, and
Elvis Kwame Agyapong
Department of Finance, Ghana Institute of Management and Public
Administration, Accra, Ghana
Abstract
Purpose –This paper aims to evaluate how strands of differing investments influence stability in the
banking industryusing data from 37 countries in Sub-SaharaAfrica from 2000 to 2018.
Design/methodology/approach –Empirical analyses in the study were carried out using a two-step
system GeneralizedMethod of Moments estimation methodology.
Findings –Empirical results suggest that generally, growth in investments by governments, foreign
investments and private domestic investmentshave a significant positive impact in stabilizing the banking
industry. The empirical estimates further suggest that macroeconomic conditions such as macroeconomic
uncertainty adverselyaffects the liquid reserve position of banks even duringperiods of appreciable growth
in investments.
Originality/value –The authors present a differentapproach to the banking industry discourse. Instead
of surmise the relationship with the directionof impact often emanating from the banking industry to other
variables of interest or conditions, thisstudy rather examines how investment dynamics among economies
influence the stability of the banking industry overtime. In contrastto related studies, this study examines
how strands of investment variablesinfluence the stability of the banking industry. Specifically, this study is
modeled to examine the extent to which variability in investment growth (using different investment
variables)affect stability in the banking industry.
Keywords Governance quality, Banking industry stability, Investment dynamics,
Two step system GMM
Paper type Research paper
1. Introduction
The banking industry performs one of the fundamentalgrowth augmenting functions in an
economy. As the primary financial entity providing financial resources in support of
economic activities in various sectors of an economy, the robustness and efficiency of the
banking industry often define the performance trajectory of other sectors of an economy.
The efficient banking industry, for instance, helps foster economic growth by promoting
investor confidence and investmentsthrough offerings of the portfolio of financial resources
in support of investment projects. In both regional and the global economy as a whole, the
banking industry, directly and indirectly, supports a myriad of activities necessary for
sustained growth and development. The impact of the banking industry on economic
growth (gross domestic product (GDP) growth [GDPG]) emanates from its fundamental
JEL classification –C13, C26, C33, G21, E22
Banking
industry
stability
215
Received11 June 2021
Revised1 September 2021
Accepted8 November 2021
Journalof Financial Regulation
andCompliance
Vol.30 No. 2, 2022
pp. 215-239
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-06-2021-0049
The current issue and full text archive of this journal is available on Emerald Insight at:
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interactions with economic agents; consumers, investors and the government. For instance,
the banking industry mobilizes savings from consumers, industry, etc., tocreate a portfolio
of various financialproducts to support investments by both investors and governments.By
providing the means to attract and mobilize savings, and further channel such idle and
speculative financialresources to the various sectors of an economy, the banking industry in
this regard, acts as the mainarteries fueling the engine responsible for productivity,sectoral
growth and ultimately generaleconomic growth.
The integral role of the banking industryas one of the core engines of economic growth;
and conditions or factors impacting its operations have been reviewed severally in the
related literature (Levine and Zervos, 1998;Beck and Levine, 2004;Ogege and Boloupremo,
2014;Rioja and Valev, 2014;Nyasha and Odhiambo,2015;Fufa and Kim, 2018;El Menyari,
2019). Apart from specific studies focusing on the banking industry and economic growth
nexus, the literature further offersa significant number of empirical reviews examining the
relationship between the operational activities of the banking industry and investments or
investment growth (refer to Aggarwaland Yousef, 2000;Omankhanlen, 2012;Wruuck et al.,
2015;Zhang et al., 2018;Mertens and Thiemann, 2019;Nwanji et al., 2020). Additionally,
related literature further highlight a legion of empirical inquiries designed to review the
fundamental association between bankingsector/industry performance and performance of
other firms in an economy (Fok et al.,2004;Giannetti and Ongena, 2009;Chuang, 2017;
Zemzem et al.,2017;Léon, 2020).
Apart from these studies, the literature further highlight a number of studiesexamining
how specific macroeconomic conditions influence operational activities or performance of
the banking industry or banks (refer to Anbar and Alper, 2011;Saeed, 2014;Yakubu, 2016;
De Leon, 2020;Chen and Lu, 2021). The above synopsis of the literature on the banking
industry, to a large extent, affirm the pivotal role of the banking industry to individual
economies, and the global economy as a whole. It further highlights variety in the range of
studies focusing on how operational activities of the banking industry affect investment
growth, economic performance, the performanceof other firms, etc. This succinct overview
of the literature further suggests that the role of the banking industry in an economy; and
the impact of its operational activities on various sectors continue to evolve with changing
macroeconomic conditionsand investor behavior.
In this study, however, we present a different approach to the banking industry
discourse. Instead of surmised relationship with the direction of impact often emanating
from the banking industry to other variables of interest or conditions, this study rather
examines how investmentdynamics among economies influence the stability of the banking
industry overtime. This approach in our view offers an opportunity to augment existing
literature on the dynamic operational characteristics of the banking industry. This reverse
approach, which focuses on how the stability of the bankingindustry may be explained by
investment dynamics,hinges on the presumption that the fundamental relationshipbetween
banks or the banking industry, the economy, investment,etc., is a symbiotic one instead of a
skewed relationship where the impact of the bankingindustry is often the focal point. That
is, although much of the attention among reviewed studies have mostlybeen on the role or
the influence the banking industry or banks have on the economy as a whole; other firms
or sectors of the economy, etc.,we are of the view that the relationship is more synergistic or
reciprocal in nature. Consequently, we hypothesize that activities or conditions associated
with various economic sectors such as investments growth have the potential to influence
the stability or otherwise of the banking industry. Accordingly, in contrast to related
studies, this study examines how strands of investment variables influence the stability of
the banking industry. Specifically, this study is modeled to examine the extent to which
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