Global financial crisis, international capital requirement and bank financial stability: an international evidence

Abstract

Purpose

Financial crises (FC) remain a global threat to the financial stability of financial institutions and international bank regulatory capital requirement (IBRCR) by the Committee on Banking Supervision provides mechanism for curbing the adverse effect of FC on financial stability. Hence, the purpose of this study is to provide, evidence on how IBRCR tones down the adverse FC effects on bank financial stability (BFS).

Design/methodology/approach

The study uses 102 economies between 2006 and 2016 in a two-step dynamic generalized method of moments model.

Findings

The results show that while FC and IBRCR negatively and positively impact BFS, respectively, it is observed that under the increasing presence of IBRCR, the negative effect of FC on BFS declines. Additionally, the results show that economies that maintain minimum IBRCR above 10.5% recommended by BASEL III are able to reinforce a significant reduction in the negative effect of FC on BFS.

Practical implications

These findings imply that in as much as financial crisis is injurious to BFS, regulators and policymakers can rely on IBRCR to avert the injurious effects of FC on BFS. Clearly, while IBRCR is necessary for reinforcing BFS through FC, bank managers who maintain IBRCR above the recommended 10.5% stands a better chance to taming the avert effect of FC on BFS. Additionally, economies that have not full adopted the BASEL minimum capital requirement may have to do so given its potential of dampening the adverse effect of FC on BFS.

Originality/value

The study presents an international perspective of how BASEL capital requirements can help tame global financial crisis using a global sample of 102 economies.

Citation

Kusi, B.A., Forson, J.A., Adu-Darko, E. and Agbloyor, E. (2023), "Global financial crisis, international capital requirement and bank financial stability: an international evidence", Journal of Financial Regulation and Compliance, Vol. 31 No. 2, pp. 237-258. https://doi.org/10.1108/JFRC-04-2022-0057