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Bank Risk in Sub-Saharan Africa: A Dynamic Panel Analysis

A new study has shed light on the risk-taking behavior of banks in sub-Saharan Africa (SSA), a region known for its robust banking systems. The research, which analyzed data from 2005 to 2018, found that despite experiencing sharp volatilities, banks in SSA are generally very liquid and solvent.

Findings

The study’s findings are reflected in Figures 1(a) and 1(b), which show the average evolution of bank risk over the study period. While there were periods of high volatility, banks in SSA maintained a relatively low level of risk, with liquidity ratios exceeding 30%.

In contrast to developed banking systems, banks in SSA were more stable during the 2009 global financial crisis, highlighting the region’s resilience. This observation is consistent with previous research that has shown banks in SSA were less affected by the crisis.

Methodology

To investigate the determinants of bank risk, the researchers employed a dynamic panel model using a two-step system generalized method of moments (GMM) estimator. They classified variables as exogenous or endogenous based on theoretical considerations and empirical literature.

The results, presented in Tables 2 and 3, show that the correlations between explanatory variables do not exhibit multicollinearity issues. The study found that bank-specific variables are weakly endogenous and were instrumented with their first and higher lags. Regulatory variables, on the other hand, were treated as endogenous and instrumented with their second and higher lags.

Results

The empirical models revealed that lagged stability indices have positive and significant coefficients, indicating persistence in risk-taking behavior. The study also found that regulatory reforms or regulations are unlikely to have an immediate impact on banks’ risk-taking behavior, with a lag of several years between policy implementation and changes in bank behavior.

Economic Significance

In terms of economic significance, the results suggest that each of the four dimensions of bank regulation has a different effect on bank risk. The study’s findings provide valuable insights for policymakers seeking to promote financial stability in SSA.

Conclusion

Overall, this research contributes to our understanding of bank risk-taking behavior in sub-Saharan Africa and highlights the importance of considering regulatory reforms and institutional factors in promoting financial stability in the region.