Banking stability determinants in Africa

Abstract

Purpose The purpose of this paper is to investigate the determinants of banking stability in Africa. Design/methodology/approach The authors present four measures of banking stability embedding banks’ loan loss coverage ratio, insolvency risk, asset quality ratio, and level of financial development, thereby allowing analysis of banking stability determinants from four complementary perspectives: protection for downside credit losses, distress arising from insolvency risk, non-performing loans, and financial development. The authors use the regression methodology to estimate the impact of financial structure, institutional, bank-level factors on bank stability. Findings The findings indicate that banking efficiency, foreign bank presence, banking concentration, size of banking sector, government effectiveness, political stability, regulatory quality, investor protection, corruption control and unemployment levels are significant determinant of banking stability in Africa and the significance of each determinant depends on the banking stability proxy employed and depends on the period of analysis: pre-crisis, during-crisis or post-crisis. Practical implications Banking supervisors in African countries should consider the role of financial structure and institutional quality for banking stability in the African region. Originality/value This study is the first to examine banking stability determinants in Africa that takes into account institutional quality and financial structure.

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