Strict banking regulations : Measuring the impact on bank risk
The banking sector is one of the most integrated sectors in most global economies. As a result of its interaction with other sectors of the economy, any movement in the banking sector needs to be properly managed to avoid potential negative consequences in other sectors. The 2008 global financial crisis (GFC) indicated the effect of negative movement in the banking sector on the economy. The consequences of the 2008 global financial crisis included the closure of banks and other financial institutions globally, a decrease in global gross domestic product and job losses. Additionally, several governments had to assist some financial institutions with money that was not previously included in their state budgets. Thus, sound and effective regulatory measures are required to control and manage risks that are inherent in several banking sectors. The primary objective of this research was to determine if there is a relationship between regulation and risk for South African banks and the banks in the top 25 soundest banking systems in the World. The study used two articles, namely; article 1 and article 2, to achieve this objective and used data from 2000 to 2017 because the period had data from pre-, during, and post the 2008 global financial crisis (GFC). Article 1 had the aim of determining if a relationship between the implementation of bank regulation and bank risk existed. The article used a sample of the top 5 banks in South Africa with the z-score as a proxy for risk. The risk in article 1 was represented by the solvency of banks. A logit regression between bank regulation and supervision; and bank risk showed that no relationship exists. However, an Auto-Regressive Distributed Lag model (ARDL) model concluded that there is a long-run relationship between bank risk and the implementation of new bank regulation and supervision for the top five South African banks. Article 2 employed a quantile regression to model the relationship between bank regulation and supervision and bank risk. Data for article 2 was gathered from banks in the top 25 nations with the soundest banking systems in the world that were ranked in the 2018/19 World Economic Forum (WEF) global competitiveness report. Through the use of factor analysis, Capital adequacy, Asset quality, Management competency, Earning quality and Liquidity, Sensitivity to market (CAMELS) indicators were used to derive various risks that can potentially affect bank risks which include liquidity and market risk, capital and earnings risk, and asset quality risk. The results showed that bank regulation and supervision assist in combating various risks faced by banks, especially high-risk banks. Article 1, through the ARDL model, proved that the more bank risk increases, the more bank regulation, and supervision are implemented. Article 2, through the use of quantile regression, found that there is a negative relationship between bank risk; and bank regulation and supervision. This means that the more bank regulation and supervision are implemented, the bank risk goes down. The findings of both articles also advocated for an increase in bank regulations whenever a potential risk arises. The study was also faced with a number of limitations that can be rectified for future studies. The first limitation was that even though the study used secondary data, some banks did not fully disclose their financial statements for the required period, which led to a few of the banks being removed from the sample. The other observed limitation was the lack of previous studies that focus on the behavioural patterns of bank risk before a crisis occurred and how those patterns can be used to possibly identify warning indicators that can be used to implement safety measures before a future risk occurs. Therefore, a potential study can research on the effectiveness of African banks to measure and combat different bank risks that they face in their markets. Moreover, another potential study can further research whether banks in Africa are employing the same regulatory measures and, if so, how bank regulatory measures in different African countries are determined to meet their domestic market.