P-SVAR Analysis of Stability in Sub-Saharan Africa Commercial Banks

Abstract

This study analyses the implication of regulation and competition for stability in the Sub-Saharan Africa (SSA) banking sector. We employ a Panel Structural Vector Autoregressive Model (P-SVAR) to investigate regulatory and competition shocks affecting stability in SSA banking sectors, using transformed quarterly data for the period 2006 to 2015 in order to recover some interesting patterns of behaviour in the structural model. A seven-variable P-SVAR with short-term restrictions is constructed from the variables of our analysis. The study provides evidence to show that variations in capital regulation among other regulatory variables employed, have the largest impact on the stability of the commercial banking sectors of SSA. While no short-term relation was found between capital and competition, the results suggest that while stability responds instantaneously to competition, most of the impacts of competition on stability are transmitted via efficiency. The implication is that crafting the right regulatory policies as suggested by our models will ensure optimal banking stability while harnessing the strong advantage that competition has for efficiency, rather than decimating efforts at fine-tuning market structure and/or degree of competition.

JEL Codes: G21, B26, C58