Government Borrowing and South African Banks’ Capital Structure: A System GMM Approach

Abstract

This paper aimed to investigate the effects of government borrowing banks’ capital structure using a sample of banks registered in South Africa from 2012 to 2021. Despite the extensive literature on this association, few prominent researchers have studied this phenomenon in the banking sector. Applying the generalised method of moments (GMM) model, the study established a positive but significant effect on the South African banks’ capital structure from total government borrowing, local government borrowing and foreign government borrowing, and capital structure. Contrary to the crowding-out effects detected, the results revealed a positive and significant relationship between government borrowing and banks’ capital structure. The crowding-in effect better explains these results, where government borrowing stimulates the local market for goods and services, motivating banks to borrow more in order to meet the demand for loans. Future research should test the cointegrating and causality relationship between government borrowing and bank capital structure. Also, given that the banking sector is constrained by Basel III’s capital adequacy requirement, controlling for this factor is critical in future research.