Basel III regulatory requirements and the performance efficiency and capital structure of selected listed African banks

Abstract

This study examined the impact of Basel III regulatory requirements on the financial performance, stability, efficiency, capital structure and risk-taking behaviour of selected listed African banks. The research hypotheses were formulated and tested using the Blundell and Bond system of Generalised Methods of Moment (GMM), pooled Ordinary Least Squares (OLS), Random Effects (RE), and Fixed Effects (FE) estimators. The study further used a panel data of 45 listed banks from six African countries that had adopted the Basel III Accord for the period 2010 to 2019. The system GMM estimator was used to estimate the impact of the Basel III regulatory requirements on the capital structure decisions of the selected African banks. Robustness tests were performed by using the two-step Blundell and Bond system GMM procedure. The robust results showed that the selected African banks were highly leveraged with a positive relationship between the Basel III minimum capital requirement, capital adequacy ratio, capital buffer premium and the bank leverage measured by the ratio of Tier 1 capital to total exposure. Furthermore, the study revealed that the bank specific capital structure determinant such as the bank size, asset tangibility and profitability had a significant and positive impact on African banks’ observed leverage and were important determinants of the discretionary capital. The trade-off, pecking order and agency cost theories were the three underpinning capital structure theories that complimentarily explained the financing behaviours of the selected African banks. Furthermore, the study used the pooled OLS, FE and RE estimators where appropriate to fit the models testing the impact of Basel III regulatory requirements on the financial performance, stability, efficiency and risk-taking behaviour of the selected African banks. Robustness tests were performed by conducting diagnostics tests such as the F- test, Breusch and Pagan test and the Hausman specification test. These tests were conducted to select the appropriate estimator amongst the pooled OLS, FE and RE estimators. To test the banks’ financial performance, the RE and FE estimators were used to fit the ROE and ROA models respectively whilst the pooled OLS estimator was used to fit the banks stability model. Moreover, to test the banks’ efficiency, vi the pooled OLS and RE estimators were used to fit the NIMR and OETA models respectively, whilst the RE estimator was used to fit the banks’ risk-taking behaviour models. Furthermore, the study showed that the capital adequacy ratio had a significant positive effect on the financial performance of the selected African banks, whilst the liquidity requirement was positively correlated to bank stability. In addition, the capital buffer premium had a significant positive impact on both measures of bank efficiency, whilst the liquidity requirements showed a more significant impact, and was consistent across all the three measures of the risk-taking behaviour of the selected African bank. The current study contributes to the body of knowledge in eight significant ways and most importantly proposes an optimum model and mix of regulatory capital requirements that can maximise the financial performance, stability and efficiency of the selected African banks.