Banking systems interdependence and risks spillovers in Sub-Saharan Africa region

Abstract

Globalisation of financial and real economic activities makes banking systems fundamentally interdependent and vulnerable to domestic, intra-regional, and global financial risks. As a result, contemporaneous changes in risk levels across banking systems can have both domestic and external origins. Against the backdrop of threats posed by the phenomenal upsurge in cross-border banking in the SSA region and the numerous episodes of systemic banking crises, the thesis examined intra-regional illiquidity and default risk spillovers across the banking systems in the SSA region and their vulnerability to adverse global liquidity risk. The thesis employed quarterly data spanning from 1996 to 2019 and the GVAR framework to model liquidity and solvency interrelationships among 31 banking systems in SSA, featuring key national, regional, and global macroeconomic factors. Further, it conducted adverse shock to each country’s impulse response function obtained from its Vector Error Correction Model with Exogenous variables (VECMX). The results show that the liquidity and solvency of banking systems in SSA are interdependent. Asymmetric, intra regional illiquidity and default risk spillover effects exist across banking systems in SSA in terms of magnitude, sign, and time. An adverse global liquidity shock undermines SSA’s banking system soundness. The economic blocs, namely ECOWAS, CEMAC and SADC, respond differently to global liquidity shocks. The results underscore the need to pay attention not only to micro-risk factors. Central banks should incorporate regional and global risks (default and liquidity) into their macroprudential framework. A set up of regional banking surveillance and stability board is required minimise risk spillovers and preventing systemic banking crisis.