The potential impact of Basel IV requirements on performance and resilience of commercial banks in Africa.

Abstract

Capital adequacy is considered an important determinant for the performance and resilience of banks because the banking sector plays a substantial role in the stability and growth of the economy. Literature shows that well-capitalised banks are associated with higher profits. Banks in Africa have revenue growth opportunities, but fragility and vulnerability to bank failures arising from capital inadequacy, non-performing loans and weak banking regulatory requirements restrict their lending capacities to support economic growth. The Basel Committee’s aim for introducing higher Basel capital requirements is to strengthen the resilience of the banking system; however, most of the African countries are slow in embracing changes in Basel regulatory requirements. Nevertheless, the implementation of higher Basel capital may affect the performance and lending ability of banks. This study examines the potential impact of Basel IV capital requirements on performance, lending, securitisation, and resilience of commercial banks from selected African countries. To achieve the set objectives, the study simulates Basel IV capital ratio using historical data from 2000 and 2018 because the implementation of Basel IV capital requirements has not commenced. In this context, the study created sample-representative banks and employed static and dynamic panel regression analyses as the estimation techniques. The results suggest that Basel IV capital requirements portend short-term negative impacts on bank performance and lending, while the long-term impact on bank performance is favourable. In addition, the findings show that higher capital requirements have a significant impact on the volume of securitisation and protect the banks from securitisation exposures; however, increasing volume of securitisation does not impact performance. Finally, capital adequacy positively impacts bank resilience and suggests that banks with a low level of capital are prone to banking distress, while banks with high capital improves resilience.