Banks, particularly through their financial intermediation activities—including deposit-taking and lending—play an essential role in financing and supporting the proper functioning of the economy. To preserve financial stability, it is therefore essential to establish prudential rules designed to ensure banks’ resilience and their ability to absorb potential shocks.
However, how can regulators ensure that the rules they establish are relevant, effective, and appropriately calibrated to the actual risks to which banks are exposed? The 2008 financial crisis revealed several major vulnerabilities within the global banking system. In its aftermath, and in response to the weaknesses identified, the Basel Committee on Banking Supervision developed the Basel III framework, notably strengthening capital, liquidity, and risk management requirements. Since then, the stress-testing exercises to which banks are regularly subjected have provided a means of assessing their ability to withstand severe economic and financial scenarios and have contributed to evaluating their overall resilience.
Through a comparative analysis of South Africa and Kenya, this study seeks to demonstrate that optimal prudential calibration should primarily reflect the level and nature of the risks actually borne by each banking system. The key issue therefore lies not solely in the uniform implementation of an international prudential framework or in simply raising regulatory requirements, but also in adapting these requirements to the specific characteristics and risk profile of each banking environment.
