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.