Capital Regulation and Bank Growth: Bank-Level Evidence from Kenya

This paper examines the relationship between regulatory capital adequacy and bank growth using a bank-level panel of licensed commercial banks in Kenya over the period 2015–2024. The study evaluates whether higher capital ratios systematically constrain balance-sheet growth in an emerging-market banking system characterized by structural heterogeneity across institutions, given the ongoing debates on the trade-off between financial stability and credit expansion under Basel-style prudential frameworks,.
By applying fixed-effects and dynamic System Generalized Method of Moments (System-GMM) estimators to account for unobserved heterogeneity, persistence, and potential endogeneity, the analysis finds no robust evidence that capital adequacy ratios exert a uniform direct effect on asset or deposit growth across banks. Instead, growth dynamics appear primarily driven by structural characteristics such as bank size, profitability, efficiency, and funding composition. The study finds larger banks exhibiting slower expansion, while profitability and funding structure play more consistent roles in shaping growth outcomes.
Heterogeneity analysis indicates that the relationship between capital and growth varies across bank tiers. While higher capital ratios are associated with weaker deposit growth among larger banks, smaller institutions display different adjustment patterns. This may imply that regulatory capital influences balance-sheet and funding strategies in a non-uniform manner. Robustness checks using alternative capital measures confirm that aggregate capital-growth relationships remain modest within the sample period.

large aggregate constraints on bank growth when institutions maintain buffers above minimum thresholds.

1. Admati, A. R., & Hellwig, M. (2013). The bankers’ new clothes: What’s wrong with banking and what to do about it. Princeton University Press. [Google Scholar] [Crossref]

2. Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297. https://doi.org/10.2307/2297968 [Google Scholar] [Crossref]

3. Berger, A. N., & Bouwman, C. H. S. (2013). How does capital affect bank performance during financial crises? Journal of Financial Economics, 109(1), 146–176. https://doi.org/10.1016/j.jfineco.2013.02.008 [Google Scholar] [Crossref]

4. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8 [Google Scholar] [Crossref]

5. Cull, R., Martínez Pería, M. S., & Verrier, J. (2018). Bank ownership and credit cyclicality: Evidence from Latin America. Review of Finance, 22(4), 1735–1770. https://doi.org/10.1093/rof/rfx045 [Google Scholar] [Crossref]

6. De Jonghe, O., Diepstraten, M., & Schepens, G. (2015). Banks’ size, scope and systemic risk: What role for conflicts of interest? Journal of Banking & Finance, 61, S3–S13. https://doi.org/10.1016/j.jbankfin.2015.08.024 [Google Scholar] [Crossref]

7. Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. The Journal of Finance, 55(6), 2431–2465. https://doi.org/10.1111/0022-1082.00296 [Google Scholar] [Crossref]

8. Gorton, G., & Winton, A. (2017). Liquidity provision, bank capital, and the macroeconomy. Journal of Money, Credit and Banking, 49(1), 5–37. https://doi.org/10.1111/jmcb.12367 [Google Scholar] [Crossref]

9. Gropp, R., Mosk, T., Ongena, S., & Wix, C. (2019). Banks’ response to higher capital requirements: Evidence from a quasi-natural experiment. Review of Financial Studies, 32(1), 266–299. https://doi.org/10.1093/rfs/hhy053 [Google Scholar] [Crossref]

10. Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica, 50(4), 1029–1054. https://doi.org/10.2307/1912775 [Google Scholar] [Crossref]

11. Kashyap, A. K., Stein, J. C., & Hanson, S. G. (2010). An analysis of the impact of substantially heightened capital requirements on large financial institutions. Journal of Economic Perspectives, 24(4), 3–28. https://doi.org/10.1257/jep.24.4.3 [Google Scholar] [Crossref]

12. Van den Heuvel, S. J. (2008). The welfare cost of bank capital requirements. Journal of Monetary Economics, 55(2), 298–320. https://doi.org/10.1016/j.jmoneco.2007.12.001 [Google Scholar] [Crossref]

• A Study on Customer Awareness on Green Banking Intiatives
• International Financial Reporting Standards and Earnings Management: A Global Research Landscape Analysis
• Analysis of Financial Performance and Operational Efficiency of State Bank of India Using the CAMEL Framework
• Roles and Performance of India Post Payment Bank (IPPB) With Special References to Shivamogga District
• Enhancing Transactional Security in U.S. Banking Systems by Implementing OTP-Based Two-Factor Authentication to Mitigate Debit and Credit Card Fraud