Abstract
This paper investigates the impact of capital adequacy regulation on financial distress resolution in the Nigerian banking industry within the ARDL framework using aggregate time series data. Financial distress resolution is measured by ratio of distressed banks, while capital adequacy regulation is measured by credit to risk weighted assets ratio, capital to total assets ratio and assets to capital ratio. The sample comprises annual time series data covering the period from 1986 to 2018, while the data are obtained from three reliable sources: namely, Central Bank of Nigeria (CBN) statistical bulletin, Nigeria Deposit Insurance Corporation (NDIC) quarterly and Nigeria Stock Exchange (NSE) fact sheet. The plausible ARDL specification is determined using the Schwarz information criterion, which selects a model with two lagged values of ratio of distressed banks as additional explanatory variables. We find that financial distress resolution exhibits persistence behavior and depends on its two lagged values, but with a positive and sizable net own effect. However, the relationship between financial distressed resolution and capital adequacy regulation measures has no lagged effect. Also, both the individual and joint impacts of the three capital adequacy regulation ratios are not statistically significant. Based on these findings, we conclude that capital adequacy regulation is not an important determinant of financial distress resolution in Nigeria, and that the regime of risk-based capital regulation may produce further moral hazards behavior in the Nigerian banking sector.
Highlights
Bank distress connotes “unhealthy situation” or a state of inability and weakness which constraints the attainment of set goals and targets by the bank
While the Schwarz Information Criterion (SIC) is used to select the optimum lag order, the estimation is based on Newey and West’s [17] robust standard errors which are consistent in the presence of unknown heteroskedasticity and serial correlation
Apriori, our results show that controlling for two lagged values of ratio of distressed banks, capital adequacy regulation has no significant effect on ratio of distressed banks
Summary
Bank distress connotes “unhealthy situation” or a state of inability and weakness which constraints the attainment of set goals and targets by the bank. It can be described as a situation “of complete or near loss of shareholders’ funds” [18]. Capital plays a crucial role, which include providing cushion for absorbing operational loses, measure of shareholder’s confidence and stake in the bank. It reveals the banks’ ability to finance the capital expenditure and fixed asset; and provides protection to depositors’ funds among others
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
