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Stability in the banking industry Perspective

from
and commodity price volatility: developing
economies
perspective from
developing economies
Rexford Abaidoo Received 13 May 2021
Revised 1 July 2021
Business, Management and Accounting, University of Maryland Eastern Shore, 10 August 2021
Princess Anne, Maryland, USA 14 September 2021
Accepted 20 September 2021
Elvis Kwame Agyapong
Accounting and Finance, Ghana Institute of Management and Public Administration,
Accra, Ghana, and
Kwame Fosu Boateng
Accounting and Finance, University of Professional Studies, Accra, Ghana

Abstract
Purpose – This paper aims to examine the effect of volatility in prices of internationally traded commodities
(the backbone of most economies) on the stability of the banking industry from three main perspectives; bank
liquidity reserves, overall bank risk and bank capital adequacy.
Design/methodology/approach – Data were compiled from various sources for 30 emerging economies
from 2002 to 2018 and were analyzed using the two-step system generalized method of moments estimation
technique.
Findings – The study finds that all things being equal, the magnitude and direction of impact of commodity
price volatility on bank stability among economies in Sub-Saharan African (SSA) depend on the type and
nature of the commodity in question; and the bank stability proxy used. For instance, an increase in crude oil
prices is found to foster stability in the banking industry (proxied by bank liquid reserves) but insignificant
when stability in the banking industry is proxied using other banking sector parameters. Additionally,
government effectiveness and corruption control have varying moderating influences on how volatility
associated with prices of internationally traded commodities influence various proxies for banking industry
stability.
Originality/value – This study highlights the effect of fluctuations in prices of key internationally traded
commodities (adjusted for foreign exchange impact) that are important sources of revenue among economies in
SSA on banking sector stability from liquidity, overall risk and capital adequacy perspectives. The influential
role of governance in the relationship between volatility in the price of commodities and bank stability is also
revealed by the study.
Keywords Commodity price volatility, Banking industry stability, Governance variables,
Generalized method of moments
Paper type Research paper

1. Introduction
In the annals of essential precursors and enabling conditions crucial for sustained economic
growth and development, stability of the banking industry or the financial sector has been
found to be critical because of its role as the core artery facilitating the allocation of capital
resources to productive sectors among economies across the globe (see Ijaz et al., 2020;
Jayakumar et al., 2018; Ntarmah et al., 2019; Jokipii and Monnin, 2013). The importance of
stable banking industry to the global economy calls for the need to ensure stability in key
Journal of Economic and
Administrative Sciences
© Emerald Publishing Limited
1026-4116
JEL Classification — F16, F10, F14, G2, G21 DOI 10.1108/JEAS-05-2021-0089
JEAS macroeconomic and industry-specific indicators crucial for the robustness of the financial
system as a whole. The banking industry has long played an irreplaceable role in financial
intermediation (Ramasastri and Unnikrishnan, 2006), servicing deficit spending units and
surplus saving units while profitably managing the corresponding risk exposures (Saunders
and Cornett, 2008). An unstable banking system would therefore imply an uncertain long-
term growth trajectory for various economic units especially entrepreneurs (Agarwal et al.,
2020). Since the banking industry serves as the core around which most productive activities
in an economy revolve, appreciation of the theoretical and the fundamental determinants of
its stability is of immense importance to all economic actors. Among policymakers, for
instance, a stable banking industry may suggest minimal volatility in key performance
indicators supporting economic growth and improved standard of living. Additionally,
among investors, a stable banking industry may suggest a stable financial system in general,
leading to a relatively higher propensity to invest. Finally, for consumers, a stable banking
industry has the potential to enhance savings, which could ultimately ensure growth in
loanable funds for further investment growth all things being equal. The importance of the
banking industry’s stability to domestic economies and the global economy as a whole in this
regard calls for the need to critically examine or evaluate conditions or factors influencing
variability in such stability to inform policies geared toward minimizing occasional
instability in the industry. To this end, among the plethora of potential conditions or factors,
this study focuses on how specific micro-level factors or variables influence stability in the
banking industry among developing economies. Specifically, we examine how dynamic
movement in prices of various internationally traded commodities influences stability in the
banking industry. A review of the extant literature suggests such commodities contribute
immensely to growth dynamics among most economies (refer to Collier and Goderis, 2012;
Harvey et al., 2017; Ge and Tang, 2020; Tahar et al., 2021). Fluctuations in prices of such
commodities may constrain projected growth, generating significant concern to key players
in various sectors of an economy. As one of the key revenue generators for most economies
around the globe, it is expected that the cascading effect of volatility in the price of
commodities on the international market would be felt on the banking industry; and for the
purpose of this study, the stability of the industry.
Although a generally accepted definition of bank stability is uncommon (Ozili, 2018), a
review of the literature suggests some commonalities among various attempts at defining the
concept. According to Brunnemeier (2009), bank instability defines a situation whereby
banks in a given jurisdiction enter into crises over a defined period, suggesting that stability
in the banking industry is akin to an operational condition devoid of a major crisis. Padoa-
Schioppa (2003) refers to the European Central Bank and aver that “financial stability is a
condition where the financial system is able to withstand shocks without giving way to
cumulative processes, which impair the allocation of savings to investment opportunities and
the processing of payments in the economy.” Again, according to Schinasi (2004), financial or
bank stability refers to a state of the operational condition of financial institutions (banks)
with relatively minimal unpredictability and a reduced level of susceptibility to shocks. Jahn
and Kick (2012) mention a situation whereby, instability may be peculiar to only a few
institutions within the banking industry over shorter periods rather than a full-blown crisis
that cuts across an entire industry over an extended period. In either case, one is right to refer
to that as bank instability. The possibility of recording any of these two scenarios stated
above within a particular jurisdiction could only be a matter of time, as the former could
quickly translate or extend into the latter. Thus, industry-wide bank instability could be the
result of risky activities undertaken among banks on the interbank deposit markets and
participation in syndicated loans or indirectly through common sector lending (Ozli, 2018;
Segoviano and Goodhart, 2009). Banks in themselves are responsible for ensuring that they
are stable over time due to their ability to efficiently allocate resources in space and time as
well as assessing and managing financial risk through self-revising mechanisms inspired by Perspective
monitoring dynamic market data (Ioana-Raluca and Dumitru-Cristian, 2015). This from
conclusion, to some extent, highlights the potential impact of external market factors, thus,
making the concept of bank stability a function of both internal managerial actions of banks
developing
in the industry and external market forces. External market forces in this instance may economies
influence decisions made by critical market players in directing the flow of funds among
optional markets like equity markets, bonds market (loanable funds) and commodities
market, ultimately contributing to the stability or otherwise of the banking industry.
Endowed with an abundance of natural resources, the Sub-Saharan African (SSA) region
benefit significantly from revenues derived from the export of key internationally traded
commodities. Revenues accruing from such export drive of mostly primary goods, which
constitute a significant portion of domestic revenue flow for most of the economies in the
region. Consequently, any significant fluctuations in the prices of such commodities on the
global market could have a significant impact on revenue flow in the domestic banking
system and the financial sector as a whole. This conclusion is consistent with the Schwartz
Hypothesis, which posits that unpredictable reductions in the price of goods and services
could be inimical to the stability of the banking sector. Among export-oriented economies,
unexpected reduction in prices of key traded commodities could negatively impact the
realization of projected revenues thereby affecting the stability of the domestic banking
industry all things being equal. Among net importing economies, however, an unexpected
rise in the price of key commodities on the global market could rather be detrimental to the
growth and stability of the banking sector. Thus, an economy’s disposition (whether net
importer or exporter) defines the extent to which variability in prices of commodities traded
on the world market influences stability in its banking sector.
From the reviewed literature, studies focusing on the impact of the price of internationally
traded commodities and fluctuations in the prices of such commodities have mostly focused
on the impact they exert on economic growth (see Arezki and Gylfason, 2011; De et al., 2015;
Emara et al., 2015; Harvey et al., 2017). Additionally, our review of the key determinants of
bank stability on the African continent found studies such as Dwumfour (2017) and Ozili
(2018) that focused primarily on examining bank-level and industry-level influencers of bank
stability. Also related to this current study is research work by Kinda et al. (2018) who focused
on a sample of export-dependent countries globally, with emphasis on a key export
commodity for each country in their analysis. The emphasis for Kinda et al. (2018) was on
price shock, a dummy variable created for negative and positive price shocks, and how the
situation impact bank stability, which is significantly different from what this study seeks to
examine. Similarly, Eberhardt and Presbitero (2021) approached the subject by constructing
country-specific aggregate commodity price (ACP) and focused on banking crises in
examining the impact of commodity price on financial instability.
This study’s approach and focus of inquiry are significantly different from the
aforementioned studies because this study’s design examines bank stability from three
main perspectives; from liquidity position of banks perspective; overall risk of banks
perspective; and capital adequacy perspective, respectively. Our approach examines the
potential influence of volatility in the price of selected internationally traded commodities
(crude oil, gold, cocoa, cotton, coffee, aluminum and natural gas) on each of these three
perspectives of bank stability. Additionally, the approach adopted in this study unlike some
related studies takes into consideration the impact of commodity price changes subject to the
prevailing exchange rate for each economy. In order words, the data used in our analysis
reflect the individual economy’s exchange rate-adjusted values. The study, therefore,
examines the impact of volatility in exchange rate-adjusted prices of key internationally
traded commodities on the stability of the banking sector among economies in SSA.
Furthermore, we also verify the extent to which domestic governance dynamics and related
JEAS policies in the sub-region influence the surmise relationship between commodity price
fluctuations and banking sector stability. Specifically, the study examines the moderating
role if any, that government effectiveness and corruption control may have on the association
between commodity price fluctuations and stability in the banking industry defined by
various perspectives of stability highlighted earlier.
We present an overview of the literature, the methodology including data sources and
variable transformations, empirical review and analysis, estimation checks and conclusions
in the subsequent sections.

2. Literature review
Bank stability (instability) has been defined or attributed to a number of both banking sector-
specific, and exogenous economic determinants in the extant literature on the banking industry.
For example, for banking sector-specific factors, models such as concentration-stability,
concentration-fragility, competition-fragility and competition-stability hypotheses that explain
different views in terms of how bank size and competition influence bank stability have been
discussed in the literature. In terms of exogenous economic factors (most importantly because
of the focus of this study), we refer to the Schwartz Hypothesis that avers that unexpected
disinflation has an inimical influence on financial (bank) stability (see Bordo and Wheelock,
1998). This hypothesis implies that the incessant pace of reduction in the price of goods and
services could result in an increased level of instability in the financial system of an economy.
Consequently, because internationally traded commodities play important roles for most
emerging economies in SSA, instability in the price of such key internationally traded
commodities could worsen the stability of banks in the sub-region all things being equal. Bordo
and Wheelock (1998) further refer to the literature in identifying the monetary and non-
monetary approaches to the discourse on determinants of financial instability. While the
monetarists view financial distress as a function of banking panics occasioned by aggravating
monetary contractions, the non-monetarist relate financial instability to turning points in
business cycles. The non-monetarist, therefore, identifies the euphoria associated with booms in
economic activities in the form of expansions and rising prices that eventually result in a
general state of over-indebtedness as a cause of the financial or banking sector instability.
From the broad empirical literature, the factors found to account for the stability of the
banking industry can generally be classified into macroeconomic factors, banking industry/
bank-specific factors and regulatory factors. In an economy where market forces are allowed
to freely determine the placement of funds, market cycles, inflation rate and unemployment
rates would influence the stability of banks though the magnitude will differ across countries
(Segoviano and Goodhart, 2009). Using a vector auto-regressive (VAR) methodology on
quarterly Organization for Economic Co-operation and Development (OECD) data for
28 years, Jokipii and Monnim (2013) found a significant direct relationship between banking
sector stability and real output growth. Unemployment rates increase would imply a fall in
industrial productivity and financial performance thereby causing loan defaults, which can
cause bank instability especially when it persists over a prolonged period across industries
(Fu, 2008). It is, therefore, needless to say, that any theoretically known macroeconomic
variable that exerts excessive inflationary pressures within an economy will ultimately cause
bank instability if left unchecked (Ozili, 2018). This assertion implies that fluctuations in
the price of commodities on the international market could exert a significant influence on
the stability of the banking industry. Other notable works that have delved into the
macroeconomic determinants of bank stability include Iriani and Yuliadi (2015), Karahano
glu
and Ercan (2015), Fakhrunnas (2019) and Viphindrartin et al. (2021).
Bank-specific factors such as ownership structure and performance have been found to be
critical in the stability of the banking industry. Thus, the persistent positive performance of
banks would be perceived to foster stability in the banking system while the reverse could Perspective
suggest some form of instability. Boateng et al. (2015), for instance, found non-performing from
loans, used as a measure of instability, to be much lower in foreign-owned banks in China
than domestic banks over the period between 2000 and 2012. Boateng et al. (2015), therefore,
developing
identified ownership structure as a key industry factor that influences banking sector economies
instability/stability. The study also concluded that foreign banks in China had lower risk-
taking tendencies than domestic banks, an indication of the influence of ownership structure
on the risk profile of banks. Ozili (2018) highlights the dynamics of state and private
ownership in the stability discourse. According to Ozili (2018), for the Chinese industry, while
privately owned domestic banks had lower liquidity and relative lower profitability (an
indication of instability), state-owned banks had higher liquidity, better gearing ratio and
better profitability (hence stability), a situation not peculiar to China but also in some African
countries. Mention could be made of other relevant studies such as Adusei (2015), Laeven et al.
(2014), Fiordelisi and Mare (2014) and Mirzaei et al. (2013) that delve into bank-specific and
banking industry factors that influence the stability of the banking industry.
A country’s governance quality can influence bank behavior (Ozili, 2018; Klomp and De
Haan, 2014; Beltratti and Stulz, 2012) which would further influence their policy and strategic
choices. Similarly, according to Ali et al. (2019), corruption positively impacts the stability of
the banking industry in Pakistan. These studies suggest that the governance system play
important role in the stability of the banking industry. Banking is a strictly regulated
industry whose continuous stability is a direct function of supervisory effectiveness and
proactiveness of the regulatory agency (Barth et al., 2013) thereby requiring continuous
improvement through reforms. These reforms though most critical should not wipe out the
risk-taking opportunities for banks; otherwise, the financial performance of banks would fall,
and the industry would become unstable (Delis and Staikouras, 2011; Bhattacharya et al.,
2002). As such, the key element in banking supervisory effectiveness is not how strict
supervisory authorities are per se (Beltratti and Stulz, 2012; Fratzscher et al., 2016) but rather
the timing of supervision, effectiveness of supervisory tools and appropriateness of
supervisory styles (Barth et al., 2013).
Focusing on the core of this study, we present a few empirical works that have approached
the subject of commodity price and bank stability. According to Kinda et al. (2018),
commodity price volatility can affect bank stability through various channels, and the degree
of impact or causality will be heavily dependent on the commodity dependency of the country
in question. In their research that focused on commodity price shocks and financial sector
fragility using a large sample of 71 commodity exporters among emerging and developing
economies, Kinda et al. (2018) identified the transmission mechanism from commodity price to
bank stability as follows.
(1) High commodity-dependent economy: Decline in commodity prices causes low export
income, which negatively reduces the government’s ability to service its debts and
spending in the economy. Thus, general funds flow in the economy falls and various
economic units’ financial performance fall thereby leading to a potential weakening of
banks’ balance sheet. This situation would most likely be systemic across the
industry.
(2) Commodities as an alternative investment vehicle: A surge in bank withdrawal
following a fall in commodity prices can potentially lead to liquidity mismatches on
the balance sheets of banks; a situation that can cripple banks.
(3) Uncoordinated government fiscal efforts at closing revenue shortfalls: In a situation
whereby there is a sudden prolonged fall in commodity prices, commodity exporters’
income would fall leading to possible efforts to adjust budgets to accommodate
JEAS revenue shortfalls. When this approach is done in an uncoordinated manner, payment
arrears to service providers, contractors and vendors would accumulate. In most
cases, these economic units would have been pre-financed by banks, hence payment
arrears accumulation would mean loan defaults in a significant magnitude.
A careful review of the above transmission mechanism would lead to the possibility of
multiple transmission mechanisms occurring in an economy concurrently or these
transmissions occurring sequentially. Kinda et al. (2018) found a negative impact exerted
by commodity price shock on financial sector performance. Negative price shocks weaken
the financial sector thereby leading to the possibility of banking crises. Bordo and
Wheelock (1998) affirm the importance of the price of commodities from a review of
episodes of financial crises in the US, UK and Canada that price level instability results in
financial instability. Cespedes and Velasco (2012) concluded to suggest that fluctuations in
commodity prices affect banks’ balance sheet and by extension, the stability of the entire
financial system. This conclusion has been affirmed by Agarwal et al. (2020) in a recent
study through the effect such fluctuations have on bank lending. Similarly, in an earlier
research in Cuba, Shelton (1994) found that sharp fluctuations in the price of sugar resulted
in credit expansion and subsequently resulting in insolvency for local banks with heavy
exposure to the sugar industry. Le Gall et al. (2004) and Agarwal et al. (2020) adduced that
negative shocks in an economic setting induce a rise in withdrawals by depositors. This
means that shocks to commodity prices could lead to panic withdrawals and eventually
instability in the banking system. Focusing on the African continent, Kablan et al. (2017)
found that commodity price cycles present an indication of impending financial crises for
commodity exporters. In a more recent study, Eberhardt and Presbitero (2021) concluded
that the volatility of commodity prices significantly predicts banking crises using data
from 60 low-income countries. Similarly, for the Southern African sub-region, Mupunga
and Ngundu (2020) found negative price shocks as having an adverse impact on
profitability as measured by Return on Asset (ROA) and Return on Equity (ROE) for a
study that used fixed effect panel regression analysis from 2000 to 2015. Elbadri and
Bektaş (2020) also focused on the Gulf Cooperation Council (GCC) countries and found gold
and oil prices to have a positive effect on bank stability in the short run. The study further
revealed that in the long run, while oil price exert positive impact, gold price negatively
affect bank stability. Again, focused on GCC countries, Saif-Alyousfi et al. (2021) examined
the effect of oil and gas price shocks on the performance of banks from 2000 to 2017. The
study revealed that movement in oil and gas prices have a direct impact on the performance
of the banking industry. For the Canadian industry, Killins and Mollick (2020) studied the
performance of the banking industry, measured by ROA and found oil price to have a
positive effect on profitability.
From the reviewed literature, it is evident that financial stability or banking sector
stability is primarily a function of both bank-specific and banking industry determinants as
well as a legion of macroeconomic factors. This study takes a micro-level approach by
examining the effect of price volatility among key commodities on the international market
on bank stability in the sub-region of SSA from the perspective of bank liquidity status,
overall risk and capital adequacy.

3. Methodology
This section discusses the sources and description of data, the econometric procedure used in
generating price volatility data for the various commodities, the presentation of the functional
form of the estimations and a brief discussion of the estimation technique used in analyzing
the data.
3.1 Sources and description of data Perspective
The study uses data compiled from 30 countries in the SSA region from 2002 to 2018. Various from
variables selected based on the set objectives of the paper were collected from diverse sources.
These sources include the World Bank’s World Development Indicators (WDI), the World
developing
Bank’s Governance Indicators (WGI), the World Bank’s Global Financial Development (GFD) economies
and the Federal Reserve Bank of St. Louis. From the WDI, we compiled data on Bank Liquid
Reserve to Assets Ratio, GDP growth, inflation and the exchange rate (US Dollar to local
currency rate). Again, from the GFD, the Bank Z score and the Capital to Asset Ratio for the
various countries were sourced, while governance variable data, specifically, corruption
control and government effectiveness indexes were also compiled from the WGI. The price of
the various commodities was also collected from the Federal Reserve Bank of St. Louis.
According to the various sources of the respective variables used in the study, we proceed
to describe the various variables. The Bank Liquid Reserve to Asset Ratio measures the ratio
of a bank’s domestic currency holdings and deposits with the monetary authorities to claims
on public and private enterprises, other governments and banking institutions. The study
hence assesses the stability of the banking sector in terms of liquidity reserves by using the
bank liquid reserve ratio. The Bank Capital to Asset Ratio also measures the ratio of bank
capital, including reserves to the total assets. It is hence a measure of capital adequacy of
banks that includes shareholders’ funds as well as general and special reserves. Again, the
stability of the banking sector is assessed in this study by resorting to an evaluation of the
capital adequacy of players in the industry in the sub-region. The Z score, another measure of
bank stability, focused on the overall risk profile of banks in the industry and measures the
probability of default in the industry is also employed in the study. According to the World
Bank, the Z score compares buffers, which is returns and capitalization with the volatility of
returns to denote bank solvency risk. The following equation measures the Z score.
ΠþҠ
Z Score ¼ (1)
σ
From equation (1), Π represents ROA, Ҡ denotes equity capital to asset ratio and σ is return
volatility, measured by the standard deviation of ROA. For the Z score, a higher value is an
indication of lower risk (stability) and a lower value means high risk (instability). The price of
the various commodities (crude oil, gold, cocoa, cotton, coffee, aluminum and natural gas) was
sourced in US Dollars per unit of measurement for the various years under study. The focus
of the paper as already alluded to is to evaluate the effect of volatility in the global price of
these commodities that have been denominated into the respective local currencies on the
stability of the banking industry. To achieve this objective, we first translate the global price
of the various commodities into their respective local denominations for each country per
year using the following equation.
ACPqt ¼ GCPqt * EXRit (2)

Per equation (2), ACPqt refers to a local currency adjusted commodity price for commodity q
at year t, GCPqt denotes global commodity price (US Dollar per unit of measurement) for
commodity q at year t and EXRit is the exchange rate (US Dollar to local currency rate) for
country i at year t. Subsequently, an econometric procedure is used to generate volatility data
from the locally denominated price of the various commodities to represent the explanatory
variables of focus for the study.

3.2 Commodity price volatility data

To derive price volatility data for all the seven commodities per year, the study uses the
GARCH modeling technique by Bollerslev (1986). This technique, deemed efficient in the
JEAS literature has been used extensively by various researchers (refer to Abaidoo and Anyigba,
2020; Asamoah et al., 2016; Abaidoo and Kwenin, 2013; Fountas and Karanasos, 2007).
According to the GARCH modeling technique, a variable’s conditional variance is dependent
on its lags, signifying that the stochastic or unpredictable element of the variable represent its
volatility data. This technique is adopted because volatility associated with key economic
variables such as the price of internationally traded commodities presents a significant
degree of risk to stakeholders, most especially to governments whose revenue base is
significantly dependent on natural resources. We first analyze the time-series properties of
the price of the commodities on the international market by conducting a unit root test using
the Augmented Dickey–Fuller and Phillips–Perron tests. We select the optimal lag order for
each of the commodities using the Akaike Information Criterion (AIC). The results of various
unit root tests are presented in Table 1. As evident from the table, the results indicate that the
price variable of all the commodities is stationary; consequently, we proceed to derive the
volatility data for each variable without having to resort to differencing procedures.
The mean equation and the GARCH (j, k) functions for deriving the volatility data are
presented as equations (3) and (4), respectively.

ACPt ¼ ω þ ҶACPt−1 þ mt (3)

where mt ≈ N (0, σ 2t )
σ 2t ¼ ϑ þ [ε2t−j þ δσ 2t−k (4)
The volatility data, represented by the volatility associated with the price of the various
commodities are denoted by σ 2t in equation (4). ϑ is the intercept of the GARCH equation, while
[ and δ are the coefficients of the ARCH and GARCH terms, respectively. The letters j and k in
equation (4) denote the number of lags of the ARCH and GARCH terms, respectively.

3.3 Functional specification

This subsection presents the functional forms of the various estimations designed to achieve
the main objectives of the study. First, we verify the effect of commodity price volatility on the
stability of the banking industry by specifying equation (5).
X7
BStabp;it ¼ ω þ αBStabp;it−1 þ λn VACPq; it þ wGDPGit þ ∅INFLit þ γ lnEXRit
n

þ CoCit þ ψ GEit þ mit

g (5)

Augmented Dickey–Fuller test Phillips–Perron test

Optimum Z(t) Z(t)
Variables Lag order Statistic Results Statistic Results

Crude oil price 4 11.676*** I(0) 27.487*** I(0)

Gold price 1 18.840*** I(0) 26.521*** I(0)
Cocoa price 1 20.005*** I(0) 26.488*** I(0)
Cotton price 4 12.891*** I(0) 26.548*** I(0)
Coffee price 4 13.318*** I(0) 28.022*** I(0)
Aluminum price 1 19.675*** I(0) 27.507*** I(0)
Natural gas price 3 14.257*** I(0) 29.140*** I(0)
Table 1. Note(s): ***p < 0.01
Unit root test results Source(s): Authors’ calculation
gAccording to equation (5), BStabp,it denotes bank stability variable p (where p is bank liquid Perspective
reserve to asset ratio, bank Z score or bank capital to asset ratio), for country i at year t, from
BStabp,it1 is the first lag of bank stability variable p for country i and VACPq,it denotes
commodity price volatility for commodity q for country i at year t. The rest are GDPGit,
developing
referring to GDP growth for country i at year t, INFLit denoting inflation rate for country i at economies
year t, lnEXRit referring to the natural log of exchange rate for country i at year t, CoCit
referring to control of corruption for country i at year t and GEit denoting government
effectiveness for country i at year t. ω is the intercept whilst α, λ, w, ∅, γ, and ψ represent the
g
coefficients of the explanatory variables in the order as they appear in equation (5). mit denotes
the error term comprising of country-specific effects, time-specific effects and the residual
component.
We proceed to present equation (6) to verify the moderating influence of the governance
variables (control of corruption and government effectiveness) in the relationship between
commodity price volatility and bank stability in the sub-region.
X 7
BStabp;it ¼ ω þ αBStabp;it−1 þ λn VACPq; it þ wGDPGit þ ∅INFLit
n (6)
þ γ lnEXRit þ CoCit þ ψ GEit þ βx ðGVx;it * VACPq;it Þ þ mit
g

GVx,it represents governance variable x (where x is control of corruption or government

effectiveness) for country i at year t and βx is the coefficient of the interaction variable for
governance variable x and commodity price volatility for commodity q, for country i at year t.
The remaining variables and symbols in equation (6) are defined as per equation (5).

3.4 Model estimation technique

We use the generalized method of moments (GMM) modeling technique by Arellano and Bond
(1991) and Arellano and Bover (1995) in analyzing the data. Among the various panel estimation
techniques available, we find the GMM as a superior technique that produces efficient and
robust results. This conclusion is based on the verified fact that the GMM technique with robust
option controls for unobserved group-specific effects, overcomes the problem of endogeneity
and permits the inclusion of lagged dependent variables in the model without loss of efficiency.
Unlike other estimation methods such as ordinary least squares and two-stage least squares that
are susceptible to failure of some auxiliary assumptions including homoscedasticity, the GMM
produces efficient results by satisfying such assumptions (Wooldridge, 2001). Again, the GMM
technique is effective in solving the problems that come with the possibility of persistence in
some of the variables in an estimation according to Sarpong-Kumankoma et al. (2018). Hwang
and Sun (2018) also assert that the two-step system variant of the GMM estimation method
produces smaller asymptotic variance, hence delivering asymptotically robust results in
comparison to the one-step variant. This study, therefore, resorts to the usage of the two-step
system variant of the GMM estimation method for the analysis. Following notable studies that
have used the technique (see Beck et al., 2000; Fiordelisi and Molyneux, 2010; Sarpong-
Kumankoma et al., 2018), we believe that the aforementioned features of the GMM alleviate the
problems with panel estimations and hence its adoption in this study.

4. Empirical estimation and analysis

The results of the various estimations, including the descriptive statistics, are presented and
analyzed in this section of the paper. We begin with a presentation of the descriptive statistics
in Table 2. As depicted in the table, on average, banks in the sub-region maintain
approximately 22% of the value of total assets as liquid reserves with a standard deviation of
JEAS Obs Mean Median Std. dev Max Min

Bank liquid reserve 477 0.2199 0.1779 0.1860 1.4553 0.0209

Z score 460 12.4623 11.6408 5.9670 44.4128 2.2039
Capital asset ratio 215 0.1111 0.1064 0.0305 0.1870 0.0149
Crude price volatility 510 0.1469 0.0734 0.3934 3.7182 0.0074
Gold price volatility 510 0.0478 0.0245 0.1048 1.1024 0.0010
Cocoa price volatility 510 0.0814 0.0536 0.1154 1.2005 0.0035
Cotton price volatility 510 0.1284 0.0641 0.2343 2.1674 0.0065
Coffee price volatility 510 0.1678 0.0828 0.1789 1.5763 0.0042
Alumi. price volatility 510 0.0802 0.0356 0.1262 1.6974 0.0006
Nat. Gas price volatility 510 0.1988 0.1440 0.3614 3.1487 0.0121
GDP growth 510 0.0463 0.0474 0.0437 0.3800 0.1241
Inflation 510 0.0623 0.0503 0.0652 0.6329 0.0897
Log exch. rate 493 5.0692 6.1534 2.0506 9.1147 0.2327
Corruption control 510 0.5629 0.6725 0.6343 1.2167 1.8264
Table 2. Gov’t effec 510 0.6215 0.6614 0.5802 1.0570 1.6969
Descriptive statistics Source(s): Authors’ calculations

approximately 19%. The bank Z score recorded an average index of 12.46 with a standard
deviation of 5.97, while the capital to asset ratio averaged 11% with a standard deviation of
3% over the study period. These observed statistics indicate that there exists a lower degree
of variability in the measures of bank stability among the various countries in the sub-region
(mean statistics higher than the standard deviations). The average volatility data for all 7
commodities are positive, an indication that throughout the study, prices are generally
appreciated. Again, GDP growth showed an average of 4.6% while the governance variables
witnessed negative average indexes over the study period; this portrays the sub-region as
comprising of developing economies with relatively deficient governance structures.
Table 3 focuses on assessing the acceptability of the various explanatory variables for the
model estimations. The results of the pairwise correlation coefficient between the various
variables are there presented and analyzed to ensure that no issues are emanating from
analyzing spurious results due to multicollinearity. Using a maximum threshold of 0.85 as
recommended by Elith et al. (2006), it is evident that none of the correlation coefficients
between the various variables fails the multicollinearity test; implying that all the variables
are acceptable for the model estimations.
In Table 4, we present results of estimation aimed at evaluating the effect of volatility in
the price of the commodities and other key variables on the stability of the banking sector in
the sub-region. Columns (1), (2) and (3) present results of the model with bank liquid reserve to
asset ratio, Z score and capital to asset ratio as the proxy for bank stability, respectively. From
all three columns, the results indicate the existence of the first-order autocorrelation in bank
stability as proxied by the various variables in the sub-region. This implies that stability in
the banking industry for the current year has a direct impact on the subsequent year all other
things being equal. The condition of the banking industry in terms of stability for a particular
year, therefore, plays an important role and could serve as an input in strategic focus for
policymakers in the subsequent year.
In Column (1), we observe that price volatility in crude oil and cotton have a significant
positive impact on the stability of the banking industry among economies in the sub-region.
This implies that for these two commodities, a percentage change (growth) in volatility in
prices helps foster stability in the banking sector in the form of an increased level of bank
liquid reserves. For most countries in the sub-region, crude oil and cotton constitute major
export products with significant revenue generation potential; persistent price appreciation
on the international market, therefore, boosts revenue generation, increase economic
 Bank Capital Crude Gold Cocoa Cotton Coffee Alumi. Gas Log
liquid Z asset price price price price price price price GDP exch. Corruption Gov’t
reserve score ratio volatility volatility volatility volatility volatility volatility volatility growth Inflation Rate control effec

Bank liquid 1
reserve
Z score 0.01 1
Capital asset 0.10 0.09 1
ratio
Crude price 0.04 0.10 0.04 1
volatility
Gold price 0.06 0.08 0.01 0.75 1
volatility
Cocoa price 0.06 0.03 0.07 0.04 0.07 1
volatility
Cotton price 0.40 0.11 0.04 0.10 0.04 0.10 1
volatility
Coffee price 0.17 0.02 0.08 0.05 0.05 0.17 0.15 1
volatility
Alumi. price 0.38 0.10 0.04 0.62 0.63 0.01 0.43 0.01 1
volatility
Gas price 0.09 0.04 0.06 0.45 0.38 0.13 0.05 0.11 0.38 1
volatility
GDP growth 0.02 0.03 0.04 0.08 0.08 0.04 0.18 0.10 0.05 0.09 1
Inflation 0.08 0.08 0.20 0.16 0.15 0.11 0.01 0.03 0.03 0.21 0.10 1
Log exch. Rate 0.09 0.03 0.05 0.02 0.10 0.22 0.05 0.09 0.01 0.07 0.09 0.14 1
Corruption 0.44 0.13 0.24 0.17 0.19 0.06 0.29 0.13 0.27 0.13 0.04 0.04 0.15 1
control
Gov’t effec 0.53 0.09 0.23 0.16 0.18 0.08 0.34 0.16 0.31 0.08 0.03 0.01 0.19 0.84 1
Source(s): Authors’ calculations
economies
developing
from
Perspective

matrix
Table 3.
Pairwise correlation
JEAS (1) (2) (3)
BLIQR Z score C/A R

1st lag 0.543*** (12.99) 0.323*** (5.96) 0.961*** (11.94)

Crude 0.408*** (2.78) 3.618 (0.72) 0.0228 (0.28)
Gold 0.0894 (0.25) 23.83** (2.50) 0.0882 (0.40)
Cocoa 0.123 (0.56) 7.191 (1.56) 0.0875* (2.00)
Cotton 0.138* (1.92) 0.388 (0.28) 0.0386 (0.78)
Coffee 0.166*** (2.78) 3.679** (2.48) 0.00675 (0.49)
Alumi 0.0634 (1.58) ***
8.655 (5.48) 0.0837 (1.27)
Ngas 0.530*** (3.51) 5.022 (1.50) 0.0166 (0.72)
GDP growth 0.977*** (4.34) 20.31** (2.06) 0.0853 (1.38)
Inflation 0.536** (2.28) 3.842 (0.79) 0.0343 (0.93)
Log. ex. rate 0.0265 (0.93) 1.707** (2.15) 0.000286 (0.34)
Corr. control 0.000777 (0.01) 5.509** (2.06) 0.000254 (0.10)
Gov’t effec 0.331*** (4.12) 7.416*** (2.83) 0.000947 (0.27)
Constant 0.280* (1.91) 1.485 (0.36) 0.00781 (0.80)
Obs 439 415 185
Countries 28 30 20
F-stat 2048.7 64.07 473.4
p-value 6.83e37 9.25e18 5.43e21
Instruments 33 31 35
AR(1) 0.0341 0.0561 0.0551
AR(2) 0.277 0.967 0.402
Hansen P 0.935 0.826 0.995
Note(s): *p < 0.1, **p < 0.05, ***p < 0.01. t-statistics in parentheses. BLIQR 5 Bank liquid reserve to Assets
Table 4. Ratio, Z score 5 Bank Z score, C/A R 5 Bank Capital to Assets Ratio, Crude 5 Crude price volatility,
Effect of commodity Gold 5 Gold price volatility, Cocoa 5 cocoa price volatility, Cotton 5 Cotton price volatility, Coffee 5 Coffee
price volatility on bank price volatility, Alumi 5 Aluminum price volatility, Ngas 5 Natural gas price volatility
stability Source(s): Authors’ calculations

activities, and ultimately, a stable banking industry. On the other hand, the estimate further
suggests a negative significant effect on banking industry stability (bank liquid reserves)
given a percentage change (growth) in volatility in prices of coffee and natural gas. It is cogent
to point out that, these two commodities are not traditionally produced commodities from the
sub-region; they are mostly imported. Consequently, price volatility (upward adjustment in
prices) on the international market, affects the domestic revenue base because as imports
become expensive, excess revenue has to be mobilized away from mostly the banking sector
to meet import responsibilities. This condition has the potential to lead to liquidity stress
among domestic banks potentially leading to instability. Volatility in the price of gold, cocoa
and aluminum on the global market was, however, found to have an insignificant effect on
bank stability (liquid reserves) among economies in SSA over the period studied. Again, from
Column (1), GDP growth and inflation rate have a significant positive impact on bank liquid
reserves; indicating that increased rate of economic activities, with its associated movement
in the price of goods and service on the local market, signify buoyant economy hence stability
in the banking sector all things being equal. Strikingly, we also observe that government
effectiveness has a negative influence on bank liquid reserves per the results of Column (1).
This outcome suggests that government effectiveness in general though critical, may not be
enough to ensure stability in the banking industry; in that, it is rather the focus of government
effectiveness/activities that defines its ultimate impact on the activities of the banking
industry or any other sector of the economy. In this regard, for instance, a focus on enhancing
one sector of the economy may inadvertently adversely influence other sectors such as the
stability of the banking industry.
 Results displayed in Column (2) indicate that volatility in the price of gold and coffee Perspective
exerts a significant negative impact on bank Z score in the sub-region. This suggests that from
fluctuations in the prices of these commodities on the international market may be inimical to
the banking industry (in terms of reducing the overall bank risk). On the other hand,
developing
aluminum price volatility has a significant positive effect on bank Z score; suggesting that a economies
percentage appreciation in prices of the commodity on the international market augment
efforts at reducing overall bank risk hence, stability. Volatility in the price of the rest of the
commodities (crude oil, cocoa, cotton and natural gas) was found to have no significant
impact on the overall stability (risk) of the banking industry for the sub-region, at least over
the period under study. Similar to results shown in Column (1), GDP growth exerts a
significant positive effect on bank Z score while government effectiveness shows a significant
negative impact on bank Z score. The results in Column (2) further indicate that the exchange
rate has a significant positive influence on the stability (bank Z score) of the banking sector;
implying that as the value of the US Dollar appreciates against the local currencies, the
banking sector may experience reduced risk or stability. This seemingly counter-intuitive
outcome is plausible to the extent that, most banks in these economies have dollar-dominated
reserves; a strategy to ensure stability due to persistent exchange rate fluctuations;
consequently, appreciation of the dollar may lead to reduced risk because of appreciation of
domestic reserves, hence, stability in the banking industry. Again, in Column (2), corruption
control is observed to have a significant positive influence on banking sector stability
(reduced level of risk). This result suggests that the stability of the banking industry benefits
immensely from efforts at curbing corruption in the various economies in the sub-region. A
reduced level of corruption means that the regulatory authorities can perform their duties
effectively to ensure a stable banking sector.
In Column (3), where we proxy bank stability by capital to asset ratio, we observe that
volatility in the price of cocoa on the international market has a significant negative influence.
This suggests that fluctuations in the price of cocoa on the international market present some
degree of uncertainty in the revenue base among economies in the sub-region. Investors will
generally respond in the form of a reduced level of investment, most especially by
stockholders hence a reduced level of capital concerning assets held by banks. Column (3)
again submits that volatility in the price of the remaining commodities and indeed all the
control variables do not exert any verifiable effect on capital to asset ratio over the period
understudy for the sub-region of SSA.
In summary, volatility in the price of noted commodities on the international market exert
diverse impacts on the stability of the banking industry in SSA; depending on the type and
relative importance of the commodity in question and the proxy for bank stability employed.
From the various empirical estimates, we find that volatility in the price of crude and cotton
has a significant positive impact on bank liquid reserve while price volatility of coffee and
natural gas impact bank liquid reserves negatively. For bank Z score (a measure of overall
bank risk), the study indicates that price volatility of gold and coffee adversely affects bank
stability (increases bank risk) while the price volatility associated with aluminum has a
positive influence on banking industry stability (reduces bank risk). For capital to asset ratio
as a proxy for bank stability, on the other hand, the study suggests that volatility in the price
of cocoa adversely impact bank stability while the remaining commodities do not exert any
significant effect.
In Tables 5 and 6, we present results of empirical estimates designed to examine the
moderating role of corruption control and government effectiveness on the nexus between
price volatility associated with the various commodities and bank liquid reserve as a proxy
for bank stability, respectively. In Table 5, the results indicate that corruption control has a
significant positive moderating effect on how volatility in the price of crude oil and aluminum
influences bank liquid reserves. This implies that corruption control policies augur well for
 JEAS

Table 5.

liquid reserves
commodity price
Moderating role of

volatility and bank

corruption control –
relationship between
(1) (2) (3) (4) (5) (6) (7)
BLIQR BLIQR BLIQR BLIQR BLIQR BLIQR BLIQR

1st lag 0.559*** (11.83) 0.612*** (12.40) 0.550*** (11.66) 0.390*** (4.73) 0.541*** (12.48) 0.615*** (9.71) 0.435*** (8.99)
** * **
Crude 0.694 (2.42) 0.677 (1.45) 0.176 (0.95) 0.347 (0.77) 0.261 (1.86) 0.421 (2.75) 0.534** (2.64)
Gold 0.0353 (0.09) 3.343 (1.11) 0.0510 (0.12) 0.479 (0.64) 0.177 (0.53) 0.108 (0.29) 0.587 (1.27)
Cocoa 0.405 (1.70) 0.402 (1.22) 0.131 (0.39) 0.192 (0.47) 0.108 (0.45) 0.311 (1.38) 0.169 (0.59)
Cotton 0.131 (1.51) 0.201** (2.38) 0.101* (1.81) 1.445*** (5.36) 0.114 (1.59) 0.141* (1.78) 0.0595 (1.08)
Coffee 0.0806 (1.47) 0.125 (1.11) 0.0570 (0.75) 0.247*** (2.85) 0.121 (1.25) 0.188** (2.50) 0.154** (2.41)
Alumi 0.140* (1.75) 0.111 (1.11) 0.0502 (1.11) 0.127* (1.76) 0.0887* (1.92) 0.503** (2.35) 0.0242 (0.58)
Ngas 0.0778 (0.56) 0.640** (2.58) 0.273*** (2.86) 0.981*** (4.99) 0.390*** (5.28) 0.483*** (3.62) 0.826** (2.37)
*** *** *** *** *** ***
GDP growth 0.831 (3.04) 0.735 (4.48) 1.018 (3.69) 1.517 (6.74) 0.907 (3.23) 0.937 (3.90) 1.207*** (6.25)
* **
Inflation 0.221 (0.99) 0.549 (1.93) 0.322 (1.25) 0.172 (0.69) 0.551 (2.18) 0.296 (1.23) 0.798*** (2.94)
Log. ex. rate 0.0402 (1.13) 0.0265 (0.63) 0.00976 (0.36) 0.0177 (0.45) 0.00738 (0.27) 0.0248 (0.65) 0.0484 (1.25)
Corr. control 0.0203 (0.20) 0.132 (1.34) 0.00123 (0.01) 0.0914 (0.65) 0.0854 (0.86) 0.00281 (0.03) 0.179** (2.08)
*** *** *** *** **
Gov’t effec 0.296 (3.06) 0.159 (1.18) 0.324 (3.42) 0.359 (3.57) 0.270 (3.34) 0.297 (2.54) 0.267** (2.25)
CoC*Crude 0.548* (1.84)
CoC*Gold 2.454 (1.24)
CoC*Cocoa 0.00276 (0.01)
CoC*Cotton 1.696*** (8.14)
CoC*Coffee 0.0448 (0.50)
CoC*Alumi 0.665** (2.75)
CoC*Ngas 0.288 (1.38)
Constant 0.0329 (0.22) 0.177 (0.64) 0.117 (1.05) 0.151 (0.83) 0.0884 (0.63) 0.258 (1.17) 0.233 (1.22)
Obs 439 439 439 439 439 439 439
Countries 28 28 28 28 28 28 28
F-stat 417.1 658.5 948.7 2130.9 389.0 211.3 116.3
p-value 8.93e-28 1.94e30 1.43e32 2.63e37 2.28e27 7.96e24 2.20e20
Instruments 33 33 33 33 33 33 32
AR(1) 0.0362 0.317 0.0483 0.00169 0.0633 0.0462 0.0267
AR(2) 0.579 0.621 0.969 0.679 0.831 0.634 0.294
Hansen P 0.889 0.910 0.912 0.814 0.820 0.812 0.790
Note(s): *p < 0.1, **p < 0.05, ***p < 0.01. t-statistics in parentheses. BLIQR 5 Bank liquid reserve to Assets Ratio, CoC 5 Corruption Control, Crude 5 Crude price
volatility, Gold 5 Gold price volatility, Cocoa 5 cocoa price volatility, Cotton 5 Cotton price volatility, Coffee 5 Coffee price volatility, Alumi 5 Aluminum price volatility,
Ngas 5 Natural gas price volatility
Source(s): Authors’ calculations
 (1) (2) (3) (4) (5) (6) (7)
BLIQR BLIQR BLIQR BLIQR BLIQR BLIQR BLIQR

1st lag 0.501*** (14.18) 0.639*** (13.11) 0.555*** (12.24) 0.495*** (6.79) 0.533*** (11.98) 0.540*** (12.09) 0.472*** (10.76)
Crude 0.101 (0.38) 0.708 (1.63) 0.159 (0.85) 0.0674 (0.31) 0.314** (2.12) 0.0457 (0.25) 0.110 (0.50)
Gold 0.0675 (0.21) 4.436** (2.47) 0.224 (0.49) 0.758** (2.13) 0.250 (0.70) 0.155 (0.41) 0.0977 (0.18)
Cocoa 0.0922 (0.43) 0.166 (0.46) 0.0925 (0.25) 0.0540 (0.26) 0.157 (0.65) 0.144 (0.61) 0.209 (0.95)
Cotton 0.108 (1.59) 0.141 (1.62) 0.0907 (1.59) 1.316*** (5.16) 0.124* (1.80) 0.0862 (1.34) 0.0567 (0.90)
Coffee 0.125* (1.98) 0.174* (1.78) 0.0104 (0.13) 0.100 (1.38) 0.0522 (0.36) 0.0430 (0.67) 0.0674 (1.15)
Alumi 0.0161 (0.26) 0.0193 (0.23) 0.0518 (1.07) 0.148 (1.65) 0.0721* (1.76) 0.452*** (3.26) 0.00823 (0.14)
*** * ** *** *** **
Ngas 0.484 (3.67) 0.845 (1.92) 0.237 (2.37) 0.660 (4.25) 0.407 (5.39) 0.182 (2.31) 0.665*** (3.27)
GDP growth 1.269*** (5.47) 0.812*** (3.08) 1.032*** (4.16) 1.185*** (4.02) 0.952*** (3.50) 0.689** (2.06) 1.280*** (6.42)
Inflation 0.492*** (2.96) 0.334 (0.74) 0.327 (1.39) 0.432* (1.77) 0.544** (2.10) 0.514*** (3.02) 0.259 (0.87)
Log. ex. rate 0.0388 (0.99) 0.0678 (1.05) 0.0142 (0.51) 0.00511 (0.14) 0.0186 (0.72) 0.0360 (0.97) 0.00534 (0.19)
Corr. control 0.0147 (0.20) 0.0979 (1.01) 0.0341 (0.33) 0.0198 (0.22) 0.0762 (0.79) 0.0841 (1.52) 0.0905 (1.01)
Gov’t effec 0.328*** (5.11) 0.161 (0.86) 0.330*** (3.13) 0.0857 (0.91) 0.285*** (3.44) 0.251*** (3.56) 0.330*** (3.67)
GE*Crude 0.209 (1.12)
GE*Gold 3.863** (2.38)
GE*Cocoa 0.182 (0.65)
GE*Cotton 1.544*** (8.13)
GE*Coffee 0.0323 (0.22)
GE*Alumi 0.409** (2.57)
GE*Ngas 0.449** (2.70)
Constant 0.337* (1.73) 0.511 (1.16) 0.0731 (0.61) 0.0861 (0.41) 0.166 (1.41) 0.119 (0.62) 0.0745 (0.46)
Obs 439 439 439 439 439 439 439
Countries 28 28 28 28 28 28 28
F-stat 5299.1 1868.8 1259.5 972.9 772.5 1500.6 13530.3
p-value 1.21e42 1.54e36 3.14e34 1.02e32 2.27e31 2.97e35 3.88e48
Instruments 33 33 33 33 33 33 33
AR(1) 0.0379 0.131 0.0472 0.00622 0.0589 0.0526 0.0481
AR(2) 0.840 0.778 0.954 0.651 0.999 0.879 0.449
Hansen P 0.947 0.994 0.880 0.794 0.838 0.916 0.781
Note(s): *p < 0.1, **p < 0.05, ***p < 0.01. t-statistics in parentheses. BLIQR 5 Bank liquid reserve to Assets Ratio, GE 5 Government Effectiveness, Crude 5 Crude price
volatility, Gold 5 Gold price volatility, Cocoa 5 cocoa price volatility, Cotton 5 Cotton price volatility, Coffee 5 Coffee price volatility, Alumi 5 Aluminum price volatility,
Ngas 5 Natural gas price volatility
Source(s): Authors’ Calculations
economies

Moderating role of
developing
from
Perspective

volatility and bank

commodity price
relationship between
effectiveness –
Table 6.

government

liquid reserves
JEAS the stability of the banking industry in periods of significant fluctuations in the price of crude
oil and aluminum on the international market. On the other hand, corruption control has a
negative moderating effect on the relationship between cotton price volatility and bank liquid
reserve, signifying that in times of persistent fluctuations in cotton price on the international
market, corruption control policies may not augment banking sector stability in terms of
bank liquid reserves (cotton is mostly imported into the sub-region). Concerning the
moderating effect of government effectiveness on the nexus between commodity price
volatility and bank liquid reserve as presented in Table 6, we observe that government
effectiveness has a negative moderating effect on how price volatility in gold, cotton,
aluminum and natural gas relates with bank stability. These observed results suggest that
some well-intended domestic government policies may rather be counter-productive in
ensuring banking sector stability in periods when key commodities traded on the
international market experienced significant price fluctuations. This outcome calls on
governments to be circumspect in how they intervene in minimizing the effects of external
economic conditions such as commodity price volatility on the international market.
Tables 7 and 8 further present results examining the influential role of corruption
control and government effectiveness on the relationship between commodity price
volatility and bank Z score (another proxy for bank stability). In Table 7, the results
presented indicate that corruption control has an adverse moderating impact on the effect
of price volatility of gold, cotton and aluminum on bank Z score in the sub-region. These
results suggest that corruption control policies to some extent weaken the extent to which
fluctuations in the prices of these commodities impact banking industry stability among
economies in the sub-region. In other words, any negative impact that may be exerted by
some of the commodities in question on banking industry stability may be lessened by
effective corruption control policies all things being equal. Additionally, in Table 8 where
bank stability is proxied by bank Z score, the results show that government effectiveness
has a negative moderating effect on the relationship between price volatility associated
with gold, cotton, aluminum, natural gas and bank Z score. These results again suggest that
government effectiveness (policies) may rather exacerbate risk to the banking industry
when an economy is experiencing significant fluctuations in the prices of the
aforementioned commodities on the international market.
We further analyze results of the moderating role of corruption control and government
effectiveness on the effect of commodity price volatility on bank capital to asset ratio (a proxy
for bank stability) in Tables 9 and 10, respectively. From the tables, reported results indicate
both corruption control and government effectiveness have a positive moderating effect on
the relationship between price volatility in gold and bank capital to asset ratio. Indicating that
good governance and augmenting institutional structures such as corruption control aid in
shoring up banking industry stability (capital reserve to assets ratio) in times of fluctuating
gold prices on the international market. We also observe that corruption control has a
negative moderating impact on the relationship between volatility in natural gas price, and
bank capital to asset ratio, suggesting that corruption control all things being equal, weakens
the extent to which volatility in the price of natural gas impact capital to asset ratio in the
banking industry.
In a nutshell, whilst the direction of moderating impact of corruption control on the
relationship between volatility of commodity prices on the international market and bank
stability depends on the commodity in question (some commodities displaying positive effect
whilst others show adverse effect), government effectiveness generally exert an adverse
influential role in the aforementioned nexus. This suggests that generally, government
policies and programs among economies in the sub-region may inadvertently be inimical to
the stability of the domestic banking industry during periods when key traded commodities
from these economies experience significant price fluctuations.
 (1) (2) (3) (4) (5) (6) (7)
Z score Z score Z score Z score Z score Z score Z score

1st lag 0.335*** (3.82) 0.201 (1.70) 0.337*** (5.81) 0.384*** (7.34) 0.328*** (5.68) 0.245*** (3.92) 0.323*** (4.81)
Crude 0.499 (0.05) 12.59 (1.55) 4.446 (0.84) 2.065 (0.36) 3.106 (0.66) 5.063 (0.84) 2.440 (0.49)
Gold 21.82 (1.50) 119.7*** (2.90) 19.12 (1.57) 28.84** (2.16) 24.80** (2.60) 28.45** (2.69) 23.37* (1.70)
* *
Cocoa 7.836 (1.59) 8.436 (1.31) 8.747 (1.47) 0.603 (0.13) 7.856 (1.71) 8.503 (1.88) 5.731 (1.12)
Cotton 0.737 (0.64) 5.185** (2.74) 0.894 (0.84) 16.55*** (2.98) 0.150 (0.11) 0.982 (0.90) 0.230 (0.19)
Coffee 4.425*** (2.80) 3.939* (1.96) 3.117* (1.97) 3.298** (2.06) 3.522 (0.67) 0.823 (0.45) 3.672** (2.25)
Alumi 8.733*** (5.09) 4.894** (2.62) 8.411*** (3.72) 8.718*** (5.66) 8.588*** (5.25) 11.20 (1.47) 9.474*** (5.93)
Ngas 4.824 (1.15) 10.05* (1.78) 5.173 (1.29) 9.045** (2.32) 3.387 (1.02) 1.917 (0.43) 10.52 (1.56)
GDP growth 22.97** (2.34) 19.75 (1.32) 22.43* (1.95) 24.16** (2.71) 23.46*** (2.79) 33.86*** (3.96) 24.25** (2.73)
Inflation 4.529 (0.79) 5.486 (0.91) 2.473 (0.47) 0.529 (0.07) 6.558 (1.37) 11.22* (1.98) 3.191 (0.59)
Log. ex. rate 1.492 (1.64) 0.620 (0.53) 2.020** (2.46) 1.970*** (2.98) 1.689* (1.98) 1.349 (1.68) 1.439** (2.10)
Corr. control 7.176** (2.26) 5.876 (1.19) 5.091* (1.89) 6.653*** (3.03) 5.292* (2.01) 6.179* (1.99) 7.270*** (3.06)
Gov’t effec 8.693*** (3.09) 6.329 (1.36) 7.522** (2.51) 5.267** (2.57) 7.793*** (3.08) 5.096 (1.57) 8.531*** (3.46)
CoC*Crude 2.761 (0.29)
CoC*Gold 75.14** (2.73)
CoC*Cocoa 3.334 (0.50)
CoC*Cotton 20.80*** (2.85)
CoC*Coffee 0.221 (0.04)
CoC*Alumi 24.08*** (3.02)
CoC*Ngas 6.402 (1.09)
Constant 0.432 (0.09) 7.318 (1.33) 4.181 (0.91) 0.612 (0.17) 1.922 (0.45) 2.220 (0.56) 0.275 (0.07)
Obs 415 415 415 415 415 415 415
Countries 30 30 30 30 30 30 30
F-stat 43.59 46.73 118.3 178.2 74.20 118.2 66.69
p-value 1.18e15 4.58e16 1.10e21 3.23e24 7.72e19 1.11e21 3.41e18
Instruments 31 31 31 31 31 31 31
AR(1) 0.0484 0.172 0.0654 0.0326 0.0537 0.0280 0.0385
AR(2) 0.854 0.503 0.984 0.396 0.829 0.426 0.572
Hansen P 0.707 0.870 0.830 0.807 0.756 0.900 0.815
Note(s): *p < 0.1, **p < 0.05, ***p < 0.01. t statistics in parentheses. Z score 5 Bank Z score, CoC 5 Corruption Control, Crude 5 Crude price volatility, Gold 5 Gold price
volatility, Cocoa 5 cocoa price volatility, Cotton 5 Cotton price volatility, Coffee 5 Coffee price volatility, Alumi 5 Aluminum price volatility, Ngas 5 Natural gas price
volatility
Source(s): Authors’ calculations
economies

Moderating role of
developing
from
Perspective

volatility and bank

Z score
commodity price
relationship between
corruption control –
Table 7.
 Z score
JEAS

Table 8.

government
effectiveness –

commodity price
Moderating role of

volatility and bank

relationship between
(1) (2) (3) (4) (5) (6) (7)
Z score Z score Z score Z score Z score Z score Z score

1st lag 0.320*** (4.99) 0.331*** (5.23) 0.326*** (5.65) 0.386*** (8.01) 0.327*** (5.74) 0.312*** (5.47) 0.320*** (5.26)
*
Crude 1.767 (0.20) 11.60 (1.99) 4.415 (0.80) 0.905 (0.13) 5.561 (0.96) 3.101 (0.50) 2.627 (0.58)
Gold 23.34* (1.98) 75.61** (2.58) 20.68 (1.63) 22.51 (1.58) 24.04** (2.34) 29.27*** (3.09) 20.57 (1.61)
* *
Cocoa 7.970 (1.60) 5.050 (1.22) 9.547 (1.76) 1.243 (0.24) 6.639 (1.41) 8.465 (1.85) 4.828 (0.88)
Cotton 0.0664 (0.04) 3.906* (1.91) 1.071 (0.96) 15.69** (2.18) 1.085 (0.91) 1.114 (0.88) 0.653 (0.52)
Coffee 4.324*** (2.85) 4.005*** (3.36) 2.962* (1.85) 2.583 (1.61) 6.337 (1.33) 1.341 (0.72) 4.345*** (2.81)
Alumi 8.778*** (4.74) 6.015*** (2.88) 8.361*** (4.05) 9.015*** (5.12) 8.311*** (4.94) 7.840 (1.04) 9.450*** (6.59)
Ngas 5.477 (1.50) 12.63*** (2.97) 4.968 (1.18) 6.284* (1.71) 6.814 (1.66) 0.815 (0.17) 15.07** (2.42)
GDP growth 20.14* (1.96) 16.01 (1.58) 23.51** (2.14) 25.25** (2.56) 22.29** (2.49) 33.41*** (4.23) 24.08*** (2.90)
Inflation 4.473 (0.87) 2.934 (0.56) 2.843 (0.51) 2.642 (0.44) 2.319 (0.45) 8.241 (1.48) 4.095 (0.80)
Log. ex. rate 1.785** (2.23) 0.919 (1.20) 2.009** (2.42) 1.919*** (3.07) 1.902** (2.20) 1.516** (2.09) 1.507** (2.39)
* * ** ** *
Corr. control 5.791 (1.97) 3.408 (0.78) 5.135 (1.84) 5.394 (2.22) 5.659 (2.10) 4.792 (1.86) 6.286*** (2.81)
Gov’t effec 7.840*** (2.95) 2.586 (0.72) 7.949** (2.37) 4.310* (1.77) 7.252** (2.59) 3.612 (1.18) 7.471*** (3.18)
GE*Crude 2.433 (0.31)
GE*Gold 49.62*** (3.06)
GE*Cocoa 3.889 (0.69)
GE*Cotton 17.53** (2.32)
GE*Coffee 2.855 (0.62)
GE*Alumi 18.71** (2.27)
GE*Ngas 10.63* (1.96)
Constant 1.796 (0.42) 4.739 (1.33) 4.231 (0.93) 1.389 (0.43) 2.498 (0.57) 0.506 (0.12) 0.0459 (0.01)
Obs 415 415 415 415 415 415 415
Countries 30 30 30 30 30 30 30
F-stat 90.53 61.93 103.2 87.42 137.9 80.83 266.1
p-value 4.76e20 9.53e18 7.55e21 7.78e20 1.25e22 2.33e19 1.04e26
Instruments 31 34 31 31 31 31 31
AR(1) 0.0510 0.0107 0.0622 0.0312 0.0597 0.0254 0.0367
AR(2) 0.981 0.615 0.953 0.324 0.760 0.298 0.219
Hansen P 0.738 0.952 0.812 0.818 0.793 0.789 0.832
Note(s): *p < 0.1, **p < 0.05, ***p < 0.01. t statistics in parentheses. Z score 5 Bank Z score, GE 5 Government Effectiveness, Crude 5 Crude price volatility, Gold 5 Gold
price volatility, Cocoa 5 cocoa price volatility, Cotton 5 Cotton price volatility, Coffee 5 Coffee price volatility, Alumi 5 Aluminum price volatility, Ngas 5 Natural gas
price volatility
Source(s): Authors’ calculations
 (1) (2) (3) (4) (5) (6) (7)
C/A R C/A R C/A R C/A R C/A R C/A R C/A R

1st lag 0.923*** (10.56) 0.947*** (12.18) 0.948*** (9.17) 0.935*** (12.31) 0.977*** (11.50) 0.936*** (11.96) 0.877*** (18.03)
Crude 0.0223 (0.11) 0.0475 (0.64) 0.0461 (0.67) 0.0235 (0.35) 0.0125 (0.13) 0.0206 (0.30) 0.0387 (0.65)
Gold 0.139 (0.60) 0.507* (1.75) 0.119 (0.66) 0.0329 (0.18) 0.0173 (0.07) 0.00640 (0.03) 0.0225 (0.15)
Cocoa 0.111** (2.59) 0.164** (2.57) 0.101 (1.65) 0.131*** (2.87) 0.0775 (1.54) 0.121** (2.80) 0.138** (2.66)
Cotton 0.0302 (0.49) 0.0270 (0.43) 0.0338 (0.49) 0.0798 (0.69) 0.0141 (0.23) 0.0406 (0.42) 0.0611 (0.90)
Coffee 0.0134 (0.39) 0.0126 (0.65) 0.00254 (0.14) 0.00842 (0.57) 0.00381 (0.24) 0.00867 (0.56) 0.0305* (1.91)
Alumi 0.00327 (0.03) 0.0827 (1.40) 0.0668 (0.75) 0.00216 (0.02) 0.0505 (0.80) 0.0318 (0.40) 0.0494 (0.56)
Ngas 0.0161 (0.43) 0.00653 (0.32) 0.00308 (0.16) 0.0107 (0.61) 0.00980 (0.27) 0.0130 (0.74) 0.0827 (1.67)
GDP growth 0.115* (2.03) 0.105** (2.30) 0.109*** (2.90) 0.00113 (0.01) 0.0625 (1.07) 0.0178 (0.20) 0.108** (2.26)
Inflation 0.0621 (0.53) 0.00334 (0.08) 0.0405 (1.04) 0.0250 (0.65) 0.0232 (0.66) 0.0356 (1.00) 0.187** (2.53)
Log. ex. rate 0.0000577 (0.08) 0.0000462 (0.08) 0.000478 (0.73) 0.000532 (1.03) 0.000116 (0.11) 0.000401 (0.74) 0.000852 (1.49)
Corr. control 0.00487 (0.33) 0.0130* (1.77) 0.00920 (1.17) 0.00283 (0.84) 0.000396 (0.06) 0.00133 (0.51) 0.0256** (2.14)
Gov’t effec 0.000562 (0.19) 0.000617 (0.18) 0.00119 (0.29) 0.00469 (1.21) 0.00191 (0.42) 0.00370 (1.04) 0.00406 (1.22)
CoC*Crude 0.0393 (0.23)
CoC*Gold 0.481* (1.85)
CoC*Cocoa 0.206 (1.17)
CoC*Cotton 0.0453 (1.08)
CoC*Coffee 0.00597 (0.13)
CoC*Alumi 0.0484 (0.88)
CoC*Ngas 0.174** (2.21)
Constant 0.0134 (1.13) 0.0102 (0.88) 0.0171 (1.36) 0.0144 (1.32) 0.00837 (0.84) 0.0134 (1.22) 0.0233** (2.70)
Obs 185 185 185 185 185 185 185
Countries 20 20 20 20 20 20 20
F-stat 665.1 349.1 327.4 502.7 3899.1 520.9 1511.2
p-value 1.71e22 7.60e20 1.39e19 2.42e21 8.85e30 1.73e21 7.15e26
Instruments 35 35 35 35 35 35 35
AR(1) 0.0354 0.0240 0.0852 0.0171 0.0314 0.0205 0.0159
AR(2) 0.285 0.181 0.351 0.357 0.327 0.319 0.248
Hansen P 0.985 0.991 0.968 0.999 0.990 0.998 0.990
Note(s): *p < 0.1, **p < 0.05, ***p < 0.01. t statistics in parentheses. C/A R 5 Bank Capital to Assets Ratio, CoC 5 Corruption Control, Crude 5 Crude price volatility,
Gold 5 Gold price volatility, Cocoa 5 cocoa price volatility, Cotton 5 Cotton price volatility, Coffee 5 Coffee price volatility, Alumi 5 Aluminum price volatility,
Ngas 5 Natural gas price volatility
Source(s): Authors’ calculations
economies

Moderating role of
developing
from
Perspective

volatility and capital

commodity price
relationship between
corruption control –
Table 9.

asset ratio
 JEAS

asset ratio
Table 10.

government
effectiveness –

commodity price
Moderating role of

volatility and capital

relationship between
(1) (2) (3) (4) (5) (6) (7)
C/A R C/A R C/A R C/A R C/A R C/A R C/A R

1st lag 0.973*** (10.45) 0.970*** (10.95) 0.952*** (9.17) 0.928*** (12.47) 0.946*** (11.22) 0.941*** (12.36) 0.958*** (11.90)
Crude 0.00191 (0.02) 0.0597 (0.95) 0.00963 (0.13) 0.00295 (0.05) 0.0375 (0.44) 0.000325 (0.01) 0.0492 (0.49)
Gold 0.195 (0.46) 0.452* (2.03) 0.00795 (0.04) 0.00127 (0.01) 0.110 (0.50) 0.0369 (0.22) 0.122 (0.56)
*** *** ** * **
Cocoa 0.204 (3.22) 0.196 (3.21) 0.0902 (1.41) 0.106 (2.65) 0.0903 (2.05) 0.106 (2.84) 0.0843** (2.23)
Cotton 0.0675 (1.18) 0.0228 (0.38) 0.0210 (0.30) 0.0870 (0.61) 0.0149 (0.23) 0.0468 (0.57) 0.0150 (0.35)
Coffee 0.0373* (1.82) 0.0337 (1.69) 0.000626 (0.03) 0.00985 (0.44) 0.00583 (0.23) 0.00997 (0.47) 0.0146 (0.40)
Alumi 0.135 (1.22) 0.0174 (0.29) 0.0627 (0.69) 0.0170 (0.22) 0.0688 (0.97) 0.0472 (0.84) 0.0648 (1.20)
Ngas 0.00517 (0.23) 0.0282 (1.11) 0.00821 (0.43) 0.0151 (0.94) 0.0233 (0.90) 0.0151 (0.92) 0.0230 (0.33)
GDP growth 0.0348 (0.57) 0.0830* (1.98) 0.0940* (2.01) 0.00356 (0.04) 0.0818 (1.32) 0.00587 (0.07) 0.0478 (0.76)
Inflation 0.0781 (1.70) 0.00806 (0.24) 0.0374 (1.00) 0.0172 (0.38) 0.0427 (1.08) 0.0289 (0.79) 0.0509 (1.41)
Log. ex. rate 0.00131 (0.74) 0.000546 (0.86) 0.0000535 (0.08) 0.000647 (1.17) 0.000578 (0.59) 0.000441 (0.83) 0.000741 (1.20)
Corr. control 0.00224 (0.57) 0.00111 (0.57) 0.000609 (0.26) 0.0000599 (0.03) 0.000535 (0.19) 0.0000657 (0.04) 0.00138 (0.45)
Gov’t effec 0.00163 (0.14) 0.0114** (2.33) 0.00223 (0.30) 0.00214 (0.76) 0.000445 (0.12) 0.00214 (0.77) 0.00982 (0.42)
GE*Crude 0.0306 (0.21)
GE*Gold 0.567** (2.40)
GE*Cocoa 0.0506 (0.54)
GE*Cotton 0.0541 (0.79)
GE*Coffee 0.0282 (0.59)
GE*Alumi 0.0664 (0.95)
GE*Ngas 0.104 (0.56)
*
Constant 0.0290 (1.79) 0.0166 (1.45) 0.0137 (1.06) 0.0130 (1.26) 0.00892 (0.89) 0.0118 (1.17) 0.00866 (0.88)
Obs 185 185 185 185 185 185 185
Countries 20 20 20 20 20 20 20
F-stat 592.6 547.7 255.3 2869.7 437.1 3995.6 2251.1
p-value 5.10e22 1.07e21 1.45e18 1.63e28 9.08e21 7.02e30 1.63e27
Instruments 35 36 35 35 35 35 35
AR(1) 0.0396 0.0415 0.0376 0.0154 0.0551 0.0232 0.0288
AR(2) 0.208 0.165 0.273 0.361 0.313 0.331 0.396
Hansen P 0.989 0.997 0.967 0.998 0.994 0.998 0.996
Note(s): *p < 0.1, **p < 0.05, ***p < 0.01. t statistics in parentheses. C/A R 5 Bank Capital to Assets Ratio, GE 5 Government Effectiveness, Crude 5 Crude price volatility,
Gold 5 Gold price volatility, Cocoa 5 cocoa price volatility, Cotton 5 Cotton price volatility, Coffee 5 Coffee price volatility, Alumi 5 Aluminum price volatility,
Ngas 5 Natural gas price volatility
Source(s): Authors’ calculations
5. Post-estimation and robustness checks Perspective
For each of the estimations as shown in Tables 6–10, we analyze the post-estimation results to from
confirm the validity and robustness of the results and inferences made for the study. We first
compare the number of instruments to the number of observations, and per the results in each
developing
of the columns of the tables, the number of instruments is less than the number of economies
observations, satisfying a key post estimation check for the GMM estimation technique. We
can also conclude that per the F-stats and their respective p-values, the models indicate
overall fitness. To test the validity of the instruments used for the various estimations, the
results of the Hansen test are analyzed. It is evident from the tables that the p-values for all the
models are greater than 0.05; this means that at the 1% alpha level, we fail to reject the null
hypothesis and conclude that the instruments are valid for purpose. Again, to check for non-
existent serial correlation, we analyze the results of the AR(2) for each of the estimations per
all the columns of the tables. Again, at the 5% alpha level, we fail to reject the null hypothesis
for all the estimations. We, therefore, assert that the error terms do not display serial
correlation. From these post estimation analyses, we conclude that the moment conditions are
correctly specified, and consequently, conclude that the models are valid for various
analyses made.

6. Conclusion
This paper examined the impact of volatility in prices of selected commodities traded on the
international market on the stability of the banking industry in SSA from the period starting
from 2002 to 2018. Annual data were compiled from relevant sources for 30 countries in the
sub-region. The stability of the banking industry was modeled from three main features of
the industry – liquidity, overall risk and capital adequacy. Bank stability was therefore
proxied by bank liquid reserve to asset ratio, bank Z score and the bank capital to asset ratio.
An econometric procedure (GARCH) was employed in deriving volatility data for the various
commodities for each of the countries used for the study. Subsequent empirical analyses were
carried out using the two-step system GMM estimation technique.
The results suggest that the magnitude and direction of impact of volatility in commodity
prices on bank stability in SSA are dependent on the nature of the commodity in question and
the feature of the banking system being assessed (the proxy used as bank stability). The
study reveals that while volatility in the price of crude oil and cotton exert a positive impact
on bank liquid reserves, price volatility of coffee and natural gas have an adverse impact on
bank liquid reserves, with the remaining commodities showing insignificant effect. Using
bank Z score as a proxy for bank stability, the study shows that volatility in gold and coffee
prices has a negative impact whilst aluminum price volatility positively affects bank
stability. The rest of the commodities were found to have no significant effect on bank Z score.
The study also concludes that only price volatility associated with cocoa has an adverse
impact on capital to asset ratio as a measure of bank stability, with the remaining
commodities showing insignificant influence. For the moderating role of governance factors
on the relationship between commodity price volatility on bank stability, the study finds that
the direction of the moderating impact of employed governance variables or otherwise
depends on the commodity in question. In general, the study concludes that government
effectiveness (policies and programs) tends to adversely impact how commodity price
volatility ultimately influences bank stability in the sub-region. For instance, this study finds
that in periods of persistent fluctuation in the price of commodities on the international
market, government policies and programs (government effectiveness) may rather be
counter-productive in ensuring banking industry stability all things being equal.
Key study findings examined above present useful information to key stakeholders
including policymakers, investors, regulators, governments and researchers who may wish
JEAS to draw inferences for further studies. To policymakers, regulators and investors, findings
examined in this study could be useful in strategic decisions and policies geared toward
promoting stability in the banking industry because of the focus on how fluctuating prices of
key commodities on the international market affect the stability of the banking sector in the
sub-region. The study implies that fluctuations in prices of commodities traded
internationally tend to have a diverse impact on various aspects of banking industry
stability. For policymaking, therefore, the study recommends continuous monitoring of the
direction of change of prices of key commodities on the global market in attempts at ensuring
a robust banking industry.
The study approached the subject matter in reference to emerging economies in SSA. As a
result, conclusions made from the study might not be applicable to emerging economies in
other regions of the globe due to the unique economic, demographic and governance
structures of the sub-region as compared to other regional blocs. We, therefore, recommend
that similar studies could be carried out in emerging economies in other regions of the globe
for region-specific findings and conclusions on the subject matter.

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Further reading
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Kazakh Bank.
Wallison, P.J. and Burns, A.F. (2011), Financial Crisis Inquiry Commission, Financial Crisis Inquiry
Commission (FCIC), pp. 443-538.

Corresponding author
Rexford Abaidoo can be contacted at: rabaidoo@umes.edu

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