Relative Importance of Time, Country and Bank-specific Effects on Bank Performance: A Three-Level Hierarchical Approach

Author(s):
Queen Magadi Mabe and Beatrice. D Simo-Kengne

Article history:
Received: May 16, 2023
Accepted: November 21, 2023

Abstract:

The present study employs the variance component model to assess the relative significance of time, firm, and country-specific factors in driving the performance fluctuations of 37 African banks over the period from 2004 to 2021. The findings indicate that time-specific factors hold greater explanatory power in elucidating variations in bank performance, followed by country-specific and bank-specific effects. Furthermore, the impact of various risk factors on bank performance is conducted, utilizing panel data estimation techniques. The study outcome is that explicit deposit insurance schemes demonstrate an adverse performance effect when implemented in conjunction with escalating leverage ratios. Consequently, it is recommended that deposit insurance schemes must be accompanied by a reduction in leverage ratios. Lastly, bank managers should closely monitor year-specific events as they account for a substantial portion of the observed performance variation.

Keywords:
bank performance, deposit insurance, and variance component models-hierarchical model


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