The impact of bank size and funding risk on bank stability

Does bank size significantly explain the variations in bank stability? Does bank funding risk significantly impact bank stability? This paper addresses these two questions with data from the rural banking industry in Ghana. Controlling for credit risk, liquidity risk, diversification in the business model, profitability, inflation, financial structure and gross domestic product, the results suggest that an increase in the size of a rural bank results in an increase in its stability. The results also show that funding risk positively impacts bank stability. The positive relationship between size and bank stability has important repercussions for the current debate on whether or not to constrain bank size to insulate the financial system from future crisis. The positive relationship between funding risk and bank stability also has important implications for the current debate on funding of retail banks.