This paper uses recent banking regulation data set to study the direct effect of banking sector regulations on banking sector stability, as well as how banking sector regulations moderates the relationship between foreign bank penetration and banking sector stability in SSA.
By using a sample of 35 SSA economies from 2007 to 2017, this study used the system Generalised Method of Moment Estimator to estimate the effect of foreign bank penetration and banking sector regulations on banking sector stability in SSA.
This study finds that there is no consistency in the direction of relationship between banking sector regulations and banking sector stability. Moreover, this study finds that due to the heterogeneity in the level of compliance to banking sector regulations among the sampled SSA economies, regulatory arbitrage could potentially harm the banking sector stability of SSA economies.
To the best of the authors’ knowledge, this study is the first to examine how foreign bank penetration, and not just foreign bank presence, affect banking sector stability of both the host and the home country, amidst the banking sector regulations.
