Regulations and banking crisis: lessons from the African context

Abstract

Purpose This study aims to investigate the coordinated impact of regulations on the predicted probability of a banking crisis in Africa. Design/methodology/approach The study used the dynamic panel instrumental variable probit regression model of 52 African economies over the period 2006 to 2018. Findings The authors observe that banking crisis is persistent for few years but dissipates in the long run. The results show that board mechanism and ownership control are important in reducing the likelihood of banking crisis. The authors found a negative impact of regulatory capital 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 crisis. 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 strong and complementary role to a robust internal control mechanisms, so as to maintain stability in the banking system. In general, regulators and policymakers should design greater coordination 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. Social implications The policy implication of the study is to build banking confidence in the society. Originality/value This study analyses the interactions of different components of internal and external regulatory framework in helping to reduce the probability of a banking crisis in Africa.