Effects of banking regulation and supervision on financial sector stability in Ghana

Abstract

The onset of the banking crisis between August 2017 and January 2020 in Ghana, which resulted in the collapse of several local banks, has rekindled policy debate on the role of banking regulation and supervision in enhancing financial stability in Ghana and the world at large. The purpose of this study is to fill this research gap by investigating the drivers of financial stability in Ghana, with a particular focus on bank regulation and supervision. The study utilizes a macro-level annual time series data covering the period 1990-2018 on financial development, bank regulation and supervision and other economic and institutional variables. The autoregressive distributed lags (ARDL) cointegration and estimation method is applied in the study. Having established the presence of cointegration, the study results provide a strong evidence that overall bank regulation and supervision contributes significantly to fostering financial stability in Ghana in the long run. Unbundling the bank regulation and supervision into its sub-components, the study finds that capital regulation and transparency in financial statement practices exert the strongest (positive and statistically significant) impact on financial stability in Ghana in the long run. As hypothesized by the theory of regulatory capture, the study also finds that corruption adversely affects financial stability in Ghana. In the light of these findings, the study provided some important policy implications and recommendations to consolidate and sustain the gains chalked so far in stabilizing the financial sector in Ghana.