Regulations and banking crisis: lessons from the African context
| DOI | https://doi.org/10.1108/JFRC-09-2021-0073 |
| Published date | 28 June 2022 |
| Date | 28 June 2022 |
| Pages | 618-645 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Daniel Ofori-Sasu,Elikplimi Komla Agbloyor,Saint Kuttu,Joshua Yindenaba Abor |
Regulations and banking crisis:
lessons from the African context
Daniel Ofori-Sasu and Elikplimi Komla Agbloyor
Department of Finance, University of Ghana Business School, Legon-Accra, Ghana
Saint Kuttu
Department of Finance, University of Ghana, Legon-Accra, Ghana, and
Joshua Yindenaba Abor
Department of Finance, University of Ghana Business School,
Legon-Accra, Ghana
Abstract
Purpose –This study aimsto investigatethe coordinated impact of regulations on the predicted probability
of a banking crisisin Africa.
Design/methodology/approach –The study used the dynamic panel instrumental variable probit
regressionmodel of 52 African economies over the period2006 to 2018.
Findings –The authors observe that banking crisis is persistent for few years but dissipates in the long
run. The results show th at board mechanism and o wnership control are i mportant in reducing th e
likelihood of bankin g crisis. The authors f ound a negative impac t of regulatory capita l and monetary
policy on the predicted probability of a banking crisis while regulatory quality was not strong in reducing
the likelihood of banking crisis. There was also evidence to support that regulatory capital and monetary
policy augment the negative impact of board mechanism and ownership control on the predicted
probability of a banking crisis.
Research limitations/implications –The limitation of the study is that it did not explore all
measures of regulatory framework and how they impact banking crisi s. However, it has an
advantage of using alternative measures of regulations in a banking crisis probability model.
Therefore, future studies should include other macro-prudential regulations, regulatory
environments and supervision and observe how they are coordinated to reduce possible crisis in a
robust methodological framework.
Practical implications –The research has policy implications for monetary authorities and
policymakers to set coordinated regulations through internal banking mechanisms that are relevant
in sustaining banking system stability goals. Countries in Africa should strengthen their quality of
regulation in such a way that it can play a strongand complementary role to a robust internal control
mechanisms, so as to maintain stability in the banking system. In general, regulators and
policymakers should design greatercoordination of external and internal regulations through a single
regulatory framework and a common resolution mechanism that make the banking system more
robust in curbing possible crisis.
JEL classification –E61, G21, L10, L51, M21
Data availability statement: The data that supports the findings of these studies are available from the
corresponding author upon request. The data is publicly available, and the arrangement of the
datasets used and/or analyzed during the current study are also available from the corresponding
author upon request.
Citation for available data.
available at: databank.worldbank.org/reports.aspx?source=global-financial-development.
available at: databank.worldbank.org/source/world-development-indicators.
Competing interests: The authors declare that they have no competing interests.
JFRC
30,5
618
Received4 September 2021
Revised5 December 2021
21February 2022
30March 2022
Accepted1 April 2022
Journalof Financial Regulation
andCompliance
Vol.30 No. 5, 2022
pp. 618-645
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2021-0073
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
Social implications –The policy implicationof the study is to build banking confidence in the society.
Originality/value –This study analyses the interactionsof different components of internal and external
regulatoryframework in helping to reduce the probabilityof a bankingcrisis in Africa.
Keywords Corporate governance, Banking crisis, Banking regulation, Regulatory policy,
Predicted probability of banking crisis, Board mechanism, Board ownership, External regulations
Paper type Research paper
1. Introduction
During the financial crisis (popularly known as the cr edit crunch), which started in the
summer of 2006 and continued into 2007, the speculation was that Africa was going to
be affected only to a limited extent [Institute of Development Studies (IDS), 2008].
However, the crisis evolved with breakneck speed, affecting most financial markets
around the African sub-region. For instance, Ghana, Nigeria, Ethiopia, South Africa
and others have suffered some crises over the years (Ladime et al., 2013;Motsi et al.,
2018). This was clearly evidenced by the 2008/2009 banking crisis in Nigeria and the
recent collapse of some banks in Ghana from 2017 to 2019. These crises could, however,
be attributed to poor regulatory framework and macro-policies of government that
eventually affect liquidity (Egboro, 2016).
According to the World Bank (2012), banking crisis occurs when many banks in a
particular country are insolvent (have liquidityproblems) at the same time –either because
they are all hit by economic and financial shocks or because the failure of one or a groupof
banks spreads to other banks in the system. Banking crisis may also be triggered by
depositors demanding their money from the bank, excessive lending or credit demand and
increasing levels of bankingcompetition (Crotty and Epstein, 2008;World Bank, 2012). More
so, the 2008/2009 global financial crisis posed challenges for economists, regulators and
banks, not only in Africa but the world at large, causing liquidity problems, defaults and
bailouts. The recent pandemic crisis presents even greater challenges than the financial
crisis, but it also offers opportunities to build a resilient banking system under sound
regulatory framework.
There is no doubt that banking crisisis a highly disruptive event that leads to sustained
declines in economic activities, financial intermediation and ultimatelyin welfare. It further
poses a challenge for academics, policymakers and practitioners. Although policymakers
devote significantefforts to develop models to attempt to predict crisis and to design policies
to mitigate its economicimpact, the question, however, is:
Q1. Is banking crisis inevitable for economies that wish to maintain a high level of
financial development?
Q2. Can we think of an optimal mix of regulations that will achieve financial
development withoutmuch exposure to crises?
Q3. Is the crisis itself sometimes a result of regulation and intervention in financial
markets?
Most regulators and financial economists will probably agreethat banking crisis is related
to panics and externalities, and that some regulatory framework is needed to reduce their
frequency and severity or stop it from occurring (Goldstein and Razin, 2015). The current
study is critical as it seeks to gaina better understanding of bankingcrisis and to suggest an
optimal response to it.
Regulations
and banking
crisis
619
To continue reading
Request your trial