Examining the Relationship Between Macroeconomic Variables and Banking Sector Stability in Ghana

Abstract

The expansion of financial services, particularly those offered by commercial banks, has coincided with faster economic growth. Banks are becoming more exposed to borrowers with high debt servicing costs due to rising consumer and corporate debt. Following the worldwide financial crises of 2008–2009, the banking sector has become unstable. This study investigated the relationship between macroeconomic variables and bank stability in Ghana. The analysis relied on secondary data collected from January 2007 to December 2021. This study analyzed the short and long-run dynamics between macroeconomic variables and bank stability measured by the capital adequacy ratio. The bounds test showed a long-run relationship between the variables of the study. From the ARDL error correction model, exchange rate and return on asset have a positive long-term impact on bank stability. On the other hand, the Ghanaian bank stability was negatively impacted in the short term by the exchange rate. The variables return to equilibrium at a significant rate of 28.9%. The study recommended that banks should establish internal policies that ensure adequate liquidity levels, strengthen the institutional environment in the country, strict compliance with laws and regulations, and currency hedging