Impact of capital regulation on interest rate pass‐through in Sub‐Saharan Africa

Abstract

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.