Bank Governance, Asset Quality, and Risk. Do Macro-Prudential Policy and Macroeconomic Factors Matter? Evidence from Nigeria’s Banking Sector

Abstract

Purpose: This study examines the nexus between bank governance, asset quality, and banking risk measured by the distance to default (DTD) and their interactions with prudential policy and macroeconomic factors. Theoretical framework: This study uses the Resource Based View (RBV) lens to examine how banks use their unique resources, asset, competencies, and governance framework to mitigate the adverse impact of risks and navigate regulatory policies and macroeconomic variables. The RBV provides context on banks’ unique resources to optimise their long-term objectives in a complex economic landscape. Design/Methodology/Approach: The study analyses panel data from 12 listed banks on the Nigeria Stock Exchanges (NGX) from 2008 to 2021. This study tests autocorrelation, heteroskedasticity, and cross-sectional dependence to validate the study’s analysis. Based on various diagnostic tests, the Feasible Generalised Least Squares (FGLS) are suitable for hypothesis testing. Findings: The findings revealed that bank governance interaction with asset quality has a negative and insignificant impact on bank risk. And liquidity, interest rate, inflation and gross domestic product are significant determinants of banking risk. Research, practical & social implications: Maintaining effective bank risk management requires adherence by all stakeholders to macro-prudential policies by monetary policymakers and macroeconomic factors from the fiscal policymakers. Originality/Value: This study empirically examines bank governance, asset quality, and banking risk in a developing country, incorporates macro-prudential policies and macroeconomic factors, and uses the DTD metric for risk assessment rarely used in related studies in developing countries.