Open AccessMutual Causal Effects Between Bank Stability and Profitability in SSA Banking System
Author(s) -
Chao Zheng,
Sinamenye Jean-Petit
Publication year - 2022
Language(s) - English
DOI - 10.47260/jafb/1241
Subject(s) - profitability index , basel iii , cointegration , economics , basel ii , profit (economics) , business , reserve requirement , financial system , econometrics , monetary economics , finance , capital requirement , monetary policy , central bank , microeconomics
This paper intends to assess the interaction between stability factors and profitabilityproxies with macroeconomic factors as controllable variables. The analysis usedbank risk metrics (LLRs, Credit Growth, and NPLs) and bank performance proxies(NIM, ROE, and ROA) with a dataset from 40 countries with 350 active commercialbanks. The study uses Autoregressive Distributed Lags estimation with DynamicFixed Effect method (ARDL-DFE) to assess both short and long-run interactioneffects. The analysis finds that both are interesting for a better sustainable bankingsystem: the results evidenced a causal interdependence effect between bankprofitability ratios and bank stability proxies. Furthermore, three causality tests andcointegration analyses were significant enough, which allowed us to conclude thatcaring for bank risk is caring for bank performance. This study recommendsregulators (central banks and the Basel Committee) to enforce the bank profitabilityto mitigate related bank risks. The study also suggests (especially Basel Committee)a regulator tool called Bank Performance/Profit Requirement Ratio (BPRR).JEL classification numbers: P430, G4, E510.Keywords: Bank, Risk, Performance, Stability, Profitability, Interdependence,DFE, SSA, Africa.