Capital Adequacy and Bank Stability in Developing Financial Systems: Cross-Country Evidence During the Basel III Implementation Phase, 2016–2024
DOI:
https://doi.org/10.59645/abr.v18i1.755Keywords:
Capital adequacy; Bank stability; Basel III; CET1; Leverage ratio; Developing financial systems; System-GMM; Z-score; non-performing loans; Emerging economiesAbstract
Capital adequacy is central to post-crisis banking regulation, yet its stabilizing role in developing financial systems under Basel III remains empirically underexplored. This study examines how Common Equity Tier 1 (CET1), total capital and the leverage ratio affect bank stability during the Basel III implementation phase, 2016–2024. Using a balanced panel of 102 commercial banks from 14 developing economies in Africa, Asia and Latin America, the analysis applies a dynamic panel framework estimated with two-step System-GMM to address persistence in stability, endogeneity between capital and risk-taking, and unobserved bank heterogeneity. Bank stability is measured by the Z-score, with capital adequacy captured by CET1, total capital and leverage ratios, and controls including non-performing loans (NPLs), profitability, bank size, GDP growth and inflation. Results show that all three capital measures are positively and significantly associated with higher Z-scores, with CET1 exerting the strongest stabilizing effect, while NPLs reduce stability and profitability, size and GDP growth enhance it, and inflation weakens it. The findings indicate that capital adequacy is a necessary but insufficient pillar of bank stability in developing financial systems and must be complemented by robust credit risk management, effective supervision and supportive macroeconomic policies.
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