Time: 13:00-15:00 (UK Time), Wednesday, 25 October 2023
Presenter: Raphael Kasonde, Bank of Zambia
Chair: Prof. Victor Murinde, SOAS University of London
Abstract
Globally, banking regulation seems to be at the crossroads: From Basle I in 1988, to Basel II in 2004, and right now stuck at Basel III, which is anchored on the use of a leverage ratio requirement (LR) to tackle the problem of excessive leverage by banks. However, a LR of 3% of tier one capital has been criticized as being too low to prevent a crisis of serious magnitude. This paper investigates whether imposing a LR far-beyond Basel III does increase bank risk-taking. Additionally, it explores the implications of compelling banks to raise actual equity capital to meet the requirements, which is the intended goal of Basel III reforms. The paper is framed within the context of Zambia's adoption of a new capital adequacy framework (NCF) in 2012. Under this framework, foreign banks were required to maintain a minimum tier one equity capital base of US$100 million, while local banks had a lower requirement of US$20 million. These requirements, on a weighted average basis, were equivalent to raising a ‘leverage ratio requirement’ from 9.9% to 24.3% for foreign banks, relative to 11.4% to 16.5% for local banks. Hence, in this study, the NCF serves as an ideal quasi-natural experiment to establish the causal effect of a far higher LR on banks’ risk-taking behaviour. Our baseline model, which employs a difference-in-difference (DID) design, shows that foreign banks exhibited a tendency to shift their portfolio towards riskier assets. Nevertheless, the model suggests that implementing a far higher LR is beneficial as it effectively leads to the overall reduction in banks’ risk of insolvency. To address endogeneity concerns, we use the instrumental variable method. Our results remain significant and consistent with the baseline model. Overall, our findings resonate with the expectations of bank regulators, that enforcing binding capital requirements induces banks to deleverage by raising additional equity capital.
Keywords: Basel III, Zambia, capital requirements, bank risk-taking, regulatory reforms.
JEL Classification: C23; D22; E44; G01; G14; L11
Presenter
Raphael Kasonde is Assistant Director, Examination and Surveillance, in the Bank Supervision Department of the Bank of Zambia (the central bank). He is a senior financial sector expert with over 20 years experience across the banking and finance arena, including bank supervision and regulation, financial analysis, risk management, accounting, auditing and other applications of financial economics. He is responsible for planning and directing the execution of examinations and surveillance programmes of commercial banks in order to assess their risk profile, financial soundness and compliance with the Banking and Financial Services Act and any other applicable legislation. He is also charged with enforcing financial supervisory policies, procedures, internal controls and delegation of authority with respect to each function to ensure clear understanding by staff of their accountabilities. Raphael is currently on a period of study leave, pursuing a full-time PhD in Finance programme at the University of Lincoln in the UK. Among other qualifications, he holds a Bachelor of Accountancy from the School of Business at the Copperbelt University (Zambia), a Master of Business Administration from the Edinburgh Business School, Heriot-Watt University (UK) and an MSc in Financial Management from the same institution. He is a Fellow of the Association of Chartered Certified Accountants (ACCA), UK and a Fellow of the Zambia Institute of Chartered Accountants (ZICA). He is a Board Member of the Lusaka Securities Exchange (LuSE), where he chairs the Finance and Audit Committee and the Listings Committe, and serves as a part-time lecturer at the University of Lusaka on a number of Masters Programmes in Risk Management and Audit Process Management, Bank Financial Management and Asset and Liability Management. He is passionate about opportunities to use his skills and expertise in finance to make an impact on the financial sector through research and influencing policy formulation.