The Macroeconomic Impact of Higher Capital Ratios on African Economies

Motivated by the recent debate on the macroeconomic implications of the new bank regulatory standards known as Basel III, this paper examines the impact of higher capital ratios on aggregate output in a comprehensive panel of African economies. The research quantifies benefits stemming from lower probability of banking crises due to more stringent capital holdings using a multivariate logit model. The paper’s findings are that there are net benefits associated with tightened capital ratios, and concludes that, by strengthening the resilience of its banking systems, the new global standards might lead to long-term welfare gains for African economies.