The Cost of Safety: Assessing the Capital Buffer Drag and Liquidity Creation Thresholds in Ghana’s Banking Sector

Abstract

This study examines whether strengthening structural capital buffers and enhancing liquidity influence shareholder equity returns in Ghana's banking sector. Additionally, it assesses how overall economic growth impacts financial intermediation over time. The study employs the Autoregressive Distributed Lag (ARDL) Bounds Testing method to examine annual time-series data spanning 2006 to 2025. The empirical results demonstrate a highly dynamic long-term equilibrium system, with the F-bounds test confirming strong cointegration. Long-term estimates show that capital adequacy has a significant negative effect on bank performance (β = -0.9961, p = 0.010). In contrast, standalone liquidity creation (β = 1.3213, p = 0.002) and GDP growth (β = 5.8165, p = 0.009) positively influence bank returns. Importantly, the macroeconomic interaction term (LQ*GDP) has a negative and significant coefficient (β = -0.1829, p = 0.006), indicating a critical threshold where diminishing returns occur in developing economies. Additionally, management efficiency and asset quality are major performance drivers that impose negative constraints on returns. This indicates that asset-liability management should be closely aligned with the business cycle. Failing to shift from passive liquidity holding to active lending during GDP upswings can create an investment drag that ultimately erodes shareholder value. The research departs from traditional, linear assumptions about bank performance by introducing a non-linear interaction term (LQ*GDP) within an ARDL framework. The study adds distinct empirical value by extending its analytical horizon to the full post-crisis landscape up to 2025, mapping the structural recovery path of universal banks following the devastating impairments arising from the 2022 Ghanaian DDEP restructuring.