Global financial crisis, international capital requirement and bank financial stability: an international evidence
| DOI | https://doi.org/10.1108/JFRC-04-2022-0057 |
| Published date | 14 September 2022 |
| Date | 14 September 2022 |
| Pages | 237-258 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Baah Aye Kusi,Joseph Ato Forson,Eunice Adu-Darko,Elikplimi Agbloyor |
Global financial crisis,
international capital requirement
and bank financial stability: an
international evidence
Baah Aye Kusi
Department of Applied Finance and Policy Management, School of Business,
University of Education, Winneba, Ghana and Department of Finance,
University of Ghana Business School, Legon, Ghana
Joseph Ato Forson
Department of Applied Finance and Policy Management,
University of Education, Winneba, Ghana
Eunice Adu-Darko
Department of Banking and Finance, Central University, Tema, Ghana, and
Elikplimi Agbloyor
Department of Finance, University of Ghana Business School, Legon, Ghana
Abstract
Purpose –Financial crises(FC) remain a global threat to the financial stabilityof financial institutions and
internationalbank regulatorycapital requirement (IBRCR)by the Committee on BankingSupervision provides
mechanism for curbing theadverse effect of FC on financial stability. Hence, thepurpose of this study is to
provide,evidence on how IBRCR tonesdown the adverse FC effectson bank financial stability(BFS).
Design/methodology/approach –The study uses 102 economiesbetween 2006 and 2016 in a two-step
dynamic generalizedmethod of moments model.
Findings –The results show that whileFC and IBRCR negatively and positivelyimpact BFS, respectively,
it is observed that under the increasing presence of IBRCR, the negative effect of FC on BFS declines.
Additionally,the results show that economies that maintain minimum IBRCR above 10.5% recommendedby
BASEL III are able to reinforcea significant reduction in the negative effect of FC on BFS.
Practical implications –These findings imply that in as much as financial crisis is injurious to BFS,
regulators and policymakers can rely on IBRCR to avert the injurious effects of FC on BFS. Clearly, while
IBRCR is necessary for reinforcing BFS through FC, bank managers who maintain IBRCR above the
recommended 10.5%stands a better chance to taming the avert effect of FC on BFS. Additionally,economies
that have not full adoptedthe BASEL minimum capital requirement may have to do so givenits potential of
dampeningthe adverse effect of FC on BFS.
Originality/value –The study presents an internationalperspective of how BASEL capital requirements
can help tame globalfinancial crisis using a global sample of 102 economies.
Keywords Stability, Capital requirement, Financial crisis, Financial stability
Paper type Research paper
Data availability statement: Data is available on Global Financial Development (https://databank.
worldbank.org/reports.aspx?source=global-financial-development) and World Development Indicators
(https://databank.worldbank.org/source/world-development-indicators).
Global
financial crisis
237
Received14 April 2022
Revised1 July 2022
Accepted14 August 2022
Journalof Financial Regulation
andCompliance
Vol.31 No. 2, 2023
pp. 237-258
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-04-2022-0057
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
Introduction
Reinhart and Rogoff (2014,2009) document that many economies around the world have
suffered several severe financial crises, which has impede the stability of banks and other
financial institutions.They argue that financial crises can be traced from 18th centuries and
caused by sovereign (public) default and bank (private) failures. Evidently, while financial
crises are not recent adverse events in the worlds’financial system,their contagious effects
on the growth and development across economies have been extremely devastating,
especially during the 2007–2009 global financial crisis (Liu et al., 2019;Ahmed et al.,2017;
Ahmed et al., 2016; Tabata, 2009). Thus, financial crises are viewed as disturbance or
unfavorable shocks that emanate from the operations and activities of financial market
participants, includingfinancial institutions, regulators and households. Interestingly,while
literature shows that financial crisis is deemed to have been mainly caused by excessive
risk-taking by financial institutions (Cai and Zhang, 2017;Imbierowicz and Rauch, 2014;
Varotto, 2011;Crotty, 2009) and laxity in financial regulations and governance (Carmassi
et al.,2009;Acharya and Richardson, 2009;Acharya et al.,2009), its effects include lack of
investor confidence (Osili and Paulson,2014;Gay et al.,1991), loss of employment (Schoen,
2017;Dhameja, 2010;Overholt, 2010), undue fiscal (Turrini et al., 2012;Honohan and
Klingebiel, 2003) and monetary policy (Nakatani, 2016;Dell’Ariccia et al.,2008;Hua Jiang,
2008;Smith, 2002) pressures, downgrading of economy by international rating agencies
(Kerstein and Kozberg, 2013;Ö
güt et al.,2012;Derviz and Podpiera, 2008) and financial
instability (Ozili,2018;Alqahtani and Mayes, 2018).
Following the possible contagious adverse effects of financial crisis, as documented
during the 2007–2009 global financial crisis (Park and Shin, 2020;Lee et al., 2018;Wang
et al.,2017), both international- and national-level regulators in the worlds’financial
framework seek to device mechanisms that tame the adverse effect of financial crisis. As
such, BASEL I, II and III remain good international examples of such mechanisms that
attempt to curb financial crisis and promote the stability and soundness of banks across
borders. Interestingly, given the important role played by capital adequacy in maintaining
banking stability across the globe, the BASEL I, II and III guidelines provide frameworks
for computing and maintaining capital adequacy of banks across borders. Specifically,
BASEL III, which is the most recent and well-known international capital regulatory
requirement, recommendsbanks to maintain a 10.5% capital-to-risk weightedassets ratio as
at 2020 (Nguyen et al.,2021;Rubio and Carrasco-Gallego, 2016;Li et al., 2016). BASEL III
framework combines capital adequacy, stress testing and market liquidity risk as
mechanisms for supervisingbank capital, operations and market activities.
Given that international capital adequacy requirements are engineered to tame banking
crisis and enhance banking stability by regulators and policymakers (Korbi and Bougatef,
2017;Oduor et al., 2017), thereis an empirical lacuna where majority of existent studies have
focused on how national-level capitaladequacy requirements affect banking stability at the
expense of how international capital requirements (BASEL capitalization requirements)
affects the stability of banks. Additionally, with the empirical notion that capital adequacy
is engineered to soak up and or curtail financial crisis to enhance stability of banks (Ryan,
2017;Uhde and Heimeshoff, 2009;Crockett, 1997), it has become imperativeto examine how
international capital requirements, specifically, capital to risk-weighted assets modulates
the effect of financial crisis to enhance stability of banks as there are limited to no studies
that examine this nexus. Thus, we expect capital to risk-weighted asset to complement the
financial crisis by reducing the negative effect of financial crisis to enhance stability of
banks. Again, we attempt to document how international capital requirements affect
stability in financial crisis and non-financial crisis periods to deepen our understanding on
JFRC
31,2
238
To continue reading
Request your trial