Macroprudential regulation, bank stability, and the credit market in Kenya

Abstract

This paper examines the effectiveness of macroprudential regulations in promoting bank stability and the credit market in the Kenyan financial system. The study applies a panel estimation methodology on bank-level and non-bank credit data for the period 2001–2021 to achieve its objectives. The study reveals three key findings. First, overall, the banking sector remains resilient as evidenced by the S-score stability measure. Second, liquidity-related, capital-based, and asset-side macroprudential regulations lower bank stability. Third, there is evidence of dampened bank credit and domestic leakage associated with macroprudential regulations. The paper concludes that macroprudential regulations are ineffective in promoting stability and the credit market. This paper recommends policymakers to use caution when implementing macroprudential conditions. This is to balance out the policy objectives of banking sector stability and access to finance. Additionally, policy makers should be mindful when implementing macroprudential measures that may cause banks to adjust their behavior, leading to domestic credit leakages and cross-border spillovers.