Bank stability and economic growth in Sub-Saharan Africa: trade-offs or opportunities? And how do institutions and bank capital affect this trade-off?

PurposeThere are concerns that while stringent capital policy may enhance banks’ resilience, it may also have other unintended economic repercussions. This study contributes to this debate by investigating whether regulatory bank capital induces a trade-off between bank stability and economic growth and whether institutional quality affects this trade-off.Design/methodology/approachThe study tested the model empirically with data from 71 banks in 9 Sub-Saharan African (SSA) countries from 2007 to 2021, using several estimators such as the system generalised methods of moments (SGMM), fixed effects (FE), two-stage least square (2SLS) and the Bayesian methods.FindingsThis study discovers that regulatory capital can maintain bank stability and economic growth, as opposed to the concern that higher regulatory capital poses economic problems. This indicates no support for a capital-induced trade-off between bank stability and economic growth, but rather opportunities. Further, while institutional quality alone does not directly impact this link, it enhances the positive effects of regulatory capital on economic growth. The findings suggest the need for governments to ensure strong institutional and capital policies to achieve economic growth.Originality/valueThis study has explored the intricate relationship among banking sector activities, institutional mechanisms, and the economy. The trade-off model is novel in the SSA literature, providing deeper insights into integrating selective Basel III into institutional strategies to achieve bank stability and economic growth.By investigating whether high regulatory bank capital induces a trade-off between bank stability and economic growth, and the impact of institutional quality and bank capital on the relationship between bank stability/capital and economics in Sub-Saharan Africa, the study offers insights that high regulatory capital can promote bank stability and economic growth simultaneously. This addresses concerns that banks constrain credit to meet regulatory capital requirements, undermining economic growth. The findings, however, suggest that regulatory capital improves stability, allowing banks to finance the economy. In addition, by establishing that the positive impact of bank stability on economic growth is stronger at higher levels of bank capital and institutional quality, this study offers bank management, policymakers, governments and financial regulators insights to supervise effective capital regulations and enhance the poor institutional environment in SSA. This guidance is critical for promoting institutional reforms, cooperative capital regulation and strong financial supervisory oversight.