The impact of liquidity and capital requirements on lending and stability of African banks

• Published in: Journal of international financial markets, institutions & money Vol. 67; p. 101201
• Main Authors: Mutarindwa, Samuel, Schäfer, Dorothea, Stephan, Andreas
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.07.2020
• Subjects: Bank stability; Basel III; Economy; Ekonomi; Lending; Net stable funding ratio; Non performing loans; Risk-weighted capital ratio; Bank stability; Lending; G21; Risk-weighted capital ratio; Non performing loans; Basel III; G28; K15; Net stable funding ratio
• ISSN: 1042-4431; 1873-0612; 1873-0612
• DOI: 10.1016/j.intfin.2020.101201

•We analyze the impact of Net Stable Funding Ratio and Total Capital Ratio on African banks.•We find that banks complying with the capital threshold lend more.•Banks complying with the liquidity threshold lend less than their non-complying peers.•Complying with the capital threshold benefits the stability-overperformers.•Regulation and the legal origin matter for compliance with Basel III. We assess whether compliance with Basel III’s main requirements, the Net Stable Funding Ratio (NSFR) and the risk-weighted Total Capital Ratio (TCR), matters for lending and stability of African banks. Banks with an NSFR or a TCR of at least the required minimum are defined as treatment group in the endogenous treatment estimations. Our results reveal that African banks complying with the capital threshold TCR lend more than banks from the less capitalized control group, while banks complying with the NSFR threshold lend less than their peers. A detailed analysis with sample splits reveals that complying with the capital threshold improves the Z-score and the ratio of non-performing loans (NPL ratio) only for those banks with stability levels above the median. The likelihood of African banks to comply with the Basel III thresholds is overall strongly dependent on the strengths of regulatory institutions in the home country and, in case of the capital ratio, also on the legal origin.