Basel macro-prudential tools and financial system stability in Nigeria

Abstract

This study aimed to determine the level of post-consolidation financial stability in Nigeria and the effect of the Basel I Accord implementation on this stability. Secondary data on post-consolidation aggregate bank profits and liquidity and post-consolidation aggregate capitalisation of banks (made in compliance with Basel I Accord) obtained from the Statistical Bulletin, 2014 were analysed using the GARCH model. Results show that there exists volatility in bank profits (indicating long-term financial instability), with the relationship between both variables positive; and there exists no volatility in aggregate bank liquidity indicating the existence of financial system stability (short-term/liquidity stability) with a significant relationship existing between Basel I Accord and the bank liquidity. These findings necessitate the immediate implementation of Basel II, II.5 and III with improved supervisory review process, disclosures and market disciplines, enhanced minimum capital and liquidity requirements to shield the system from external shocks and cross-border contagion.