Purpose In a bid to enhance the stability of banks, supervisory authorities in sub-Sahara Africa (SSA) have also adopted international bank regulatory standards based on the Basel core principles. This paper aims to investigate the effectiveness of these regulations in mitigating Bank risk (instability) in SSA. The focus of empirical analysis is on examining the implications of four regulations (capital, activity restrictions, supervisory power and market discipline) on risk-taking behaviour of banks. Design/methodology/approach This paper uses two dimensions of financial stability in relation to two different sources of bank risk: solvency risk and liquidity risk. This paper uses information from the World Bank Regulatory Survey database to construct regulation indices on activity restrictions and the three regulations pertaining to the three pillars of Basel II, i.e. capital, supervisory power and market discipline. The paper then uses a two-step system generalised method of moments estimator to estimate the impact of each regulation on solvency and liquidity risk. Findings The overall results show that: regulations pertaining to capital (Pillar 1) and market discipline (Pillar 3) are effective in reducing solvency risk; and regulations pertaining to supervisory power (Pillar 2) and activity restrictions increase liquidity risk (i.e. reduce bank stability). Research limitations/implications Given some evidence from other studies which show that market power (competition) tends to condition the effect of regulations on bank stability, it would have been more informative to examine whether this is really the case in SSA, given the low levels of competition in some countries. This study is limited in this regard. Practical implications The key policy implications from the study findings are three-fold: bank supervisory agencies in SSA should prioritise the adoption of Pillars 1 and 3 of the Basel II framework as an effective policy response to enhance the stability of the banking system; a universal banking model is more stability enhancing; and there is a trade-off between stronger supervisory power and liquidity stability that needs to be properly managed every time regulatory agencies increase their supervisory mandate. Originality/value This paper provides new evidence on which Pillars of the Basel II regulatory framework are more effective in reducing bank risk in SSA. This paper also shows that the way regulations affect solvency risk is different from that of liquidity risk – an approach that allows for case specific policy interventions based on the type of bank risk under consideration. Ignoring this dual dimension of bank stability can thus lead to erroneous policy inferences.

Using monthly data from 2005 to 2019, we employ a dynamic heterogeneous cross‐sectionally autoregressive distributed lag (CS‐ARDL) model to examine the impact of higher regulatory capital requirements on the interest rate pass‐through (IRPT) to bank lending and deposit rates in 22 Sub‐Saharan Africa (SSA) countries. Two key findings emerge from the investigation: (i) the average IRPT in SSA is incomplete in the long run, and (ii) stringent (higher) regulatory capital requirements reduce the pass‐through of monetary policy to commercial bank lending and deposit rates. The findings suggest that although higher regulatory capital requirements are an effective macro‐prudential tool for enhancing the stability of the banking sector, they could also have the unintended consequences of limiting economic expansion. This trade‐off calls for a careful analysis and balance in the implementation of monetary and bank regulatory policies in the region.