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Regulatory capital and its effect on credit growth, non-performing loans and bank efficiency

Author

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  • Eric Osei-Assibey
  • Joseph Kwadwo Asenso

Abstract

Purpose - – This paper aims to investigate the influence of the central bank’s regulatory capital on commercial banks specific performance outcomes such as credit supply, interest rate spread (as a measure of efficiency) and non-performing loans (NPLs). Design/methodology/approach - – Using specific commercial bank-level panel data from 2002-2012, a system of equations was modeled that allows us to apply the system generalized methods of moment approach and estimate the equations, while controlling for specific bank level, industry and macroeconomic variables. Findings - – The study finds a positive relationship between a net minimum capital ratio and the net interest margin. Although this is in contrast with the study expectations, the result suggests that a high net minimum capital requirement would widen the spread between the lending and saving rates. The study further finds evidence to support the fact that high minimum capital requirement and excess capital above the minimum required drive credit growth in the banking sector of Ghana. However, high excess capital increases risk-taking activities of the banks, as excess capital is found to be associated with high NPL ratios. Practical implications - – Given the economic benefits and costs of sharply increasing bank regulatory capital, our results speak to the ongoing debates on the right level of capital, the effectiveness of the Bank of Ghana policy rate (PR) and the high lending rates that appear to respond only slowly to macroeconomic indicators such as the PR and the inflation rate. The finding also has practical implications for the adoption of the Basel III accord. Originality/value - – The empirical literature has not paid enough attention to the impact of regulatory capital on the three specific bank-level outcomes – NPLs, interest rate spread and the nature of interrelationships among these variables, particularly in the African context.

Suggested Citation

  • Eric Osei-Assibey & Joseph Kwadwo Asenso, 2015. "Regulatory capital and its effect on credit growth, non-performing loans and bank efficiency," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 7(4), pages 401-420, November.
  • Handle: RePEc:eme:jfeppp:v:7:y:2015:i:4:p:401-420
    DOI: 10.1108/JFEP-03-2015-0018
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    Citations

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    Cited by:

    1. Oksana Omelchenko & Oleksandr Dorokhov & Oleg Kolodiziev & Liudmyla Dorokhova, 2018. "Fuzzy Modeling of the Creditworthiness Assessments of Bank’s Potential Borrowers in Ukraine," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 100-125.
    2. Adesina, Kolade Sunday, 2019. "Basel III liquidity rules: The implications for bank lending growth in Africa," Economic Systems, Elsevier, vol. 43(2), pages 1-1.
    3. Kumar Debasis Dutta & Mallika Saha, 2021. "Nexus of governance, macroprudential policy and financial risk: cross-country evidence," Economic Change and Restructuring, Springer, vol. 54(4), pages 1253-1298, November.
    4. Changjun Zheng & Anupam Das Gupta & Syed Moudud-Ul-Huq, 2017. "Do market competition and development indicators matter for banks’ risk, capital, and efficiency relationship?," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-27, June.
    5. Lutfi, & Suyatno,, 2019. "Determinants of Bank Efficiency: Evidence from Regional Development Banks," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 53(3), pages 59-74.
    6. Bermpei, Theodora & Kalyvas, Antonios & Nguyen, Thanh Cong, 2018. "Does institutional quality condition the effect of bank regulations and supervision on bank stability? Evidence from emerging and developing economies," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 255-275.
    7. Abdul Aziz Khan Niazi & Suleman Aziz Lodhi & Abdul Basit & Tehmina Fiaz Qazi, 2020. "Tacit Knowledge Sharing Model For Banks: Remedial Measure Of Likelihood Of Default," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 9(1), pages 32-50, March.
    8. Retselisitsoe I. Thamae & Nicholas M. Odhiambo, 2022. "The impact of bank regulation on bank lending: a review of international literature," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(4), pages 405-418, December.
    9. Florian Manz, 2019. "Determinants of non-performing loans: What do we know? A systematic review and avenues for future research," Management Review Quarterly, Springer, vol. 69(4), pages 351-389, November.
    10. Mutarindwa, Samuel & Schäfer, Dorothea & Stephan, Andreas, 2020. "The impact of liquidity and capital requirements on lending and stability of African banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 67(C).

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