Bank Risk-Taking Behavior in Africa: The Influence of Net Stable Funding Ratio

In the aftermath of the 2008-2009 global financial crisis, the Basel Committee on Banking Supervision set new regulatory requirements, tagged Basel III, aimed at preventing banking instability during periods of economic strain. One of the Basel III requirements is Net Stable Funding Ratio (NSFR), defined as the amount of available stable funding as a percentage of the amount of required stable funding. To meet the requirement, banks must have available stable funding that is greater than or equal to the amount of the required stable funding. The basic idea behind the Basel III NSFR requirement is that banks with sufficient stable and long-term funding can more effectively maintain their intermediation capacity amid external negative financial and economic shocks. However, the possible bank performance effects of this requirement have become a cause for concern since its inception in 2010. Against this backdrop, the aim of this paper is to use empirical means to explore the potential impacts of this requirement on bank risk-taking behaviour. Using a sample that consists of 376 commercial banks in 38 African countries over the 2005–2015 period, the paper examines the possible effect of the Basel III Net Stable Funding Ratio requirement on three bank risk measures. These measures include the ratio of loan loss provisions to total assets, the ratio of non-performing loans to total loans and Z-score. In static and dynamic panel frameworks, the results reveal that NSFR is negatively associated with the ratio of loan loss provisions to total assets and the ratio of non-performing loans to total loans and positively related to Z-score, indicating that NSFR reduces bank risk. In other words, the results suggest that when stable funding increases, the banks' risk-taking behaviour reduces and their financial stability increases. The results are robust to a battery of estimation techniques, including quasi-maximum likelihood estimation technique, two-step system generalized method of moment, fixed effects, etc. The findings of this study highlight that banks' liquidity management has implications for their loan portfolio risk. The findings also suggest that the Basel NSFR requirement can be implemented to reduce bank risk-taking behaviour in Africa.