Identifying Problem Banks in Sub-Sahara Africa: Problem Banks in Africa (original) (raw)

African Finance Journal, 2002

Abstract

This paper uses a large panel dataset of 62 commercial banks from 11 African countries for the period 1991 - 1998 to empirically isolate the determinants of bank risk in African economies. It is found that liquidity and asset quality variables are the most important indicators of bank risk. The evidence on liquidity is consistent with the theory that contagion risk is the main inertia behind bank runs, in the context that severe liquidity constraints seriously undermine public confidence and are signals of terminal risk. The evidence on asset quality suggests that deterioration in asset quality is a precursor of terminal risk. The main policy implication of these findings is that liquidity and asset quality variables are potential "early warning" indicators of bank failure in African economies.

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