Liquidity Management, Basel Capital Adequacy and Financial Distress Resolution in the Nigerian Banking Industry

Adolphus J Toby ,Jibaniya Katon Danjuma

doi:10.11648/j.jfa.20210904.16

Abstract

The purpose of this study is to analyze the effect of liquidity management and BASEL capital adequacy on financial distress resolution in Nigeria. The study adopts a unidirectional causal research design within the single-equation dynamic autoregressive distributive lag (ARDL) framework. The empirical analysis is based on annual time series data covering the period from 1986 to 2018 obtained from different Central Bank of Nigeria (CBN) statistical bulletin and Nigeria Deposit Insurance Corporation (NDIC) quarterly as well as the factsheet of the Nigerian Stock Exchange (NSE). The stationarity test results indicate that the study variables are integrated at different levels, with most of them being I(1) series. The ARDL results show that micro-prudential liquidity management has no significant effect on ratio of distressed banks, while the effect of macro-prudential liquidity management on ratio of distressed banks is significant. The results also show that capital adequacy regulation has no significant effect on both ratio of distressed banks and governance/compliance breaches of distressed banks, while it has a significant effect on business risks exposure of the distressed banks and asset quality of distressed banks. Further, monetary policy measures have no significant effect on the level of distress in the Nigerian banking industry. Based on these findings, we conclude that in Nigeria, prudential measures aimed at achieving macro-level financial sector stability have significant policy implications for financial distress resolution. Also, while traditional monetary policy measures are not effective tools for achieving financial sector stability, the effect of capital adequacy regulation on financial distress resolution depends on how the former is measured. The main contribution of this study is the use of Newey-West robust framework, which consistently estimated the effect of liquidity management and BASEL capital adequacy on financial distress resolution even when both heteroskedasticity and autocorrelation are present in the data.

Highlights

The financial sector of any economy occupies a central position in the economic development process
While the Schwarz information criterion (SIC) is used to select the optimum lag order, the estimation is based on Newey and West’s [73] robust standard errors which are consistent in the presence of unknown heteroskedasticity and serial correlation
This implies that micro-prudential factors such as assets to debt ratio and interest to deposit ratio do not contain relevant information for predicting financial distress in Nigeria

Summary

Introduction

The financial sector of any economy occupies a central position in the economic development process. It assists in promoting accelerated economic growth through the process of financial intermediation. There are disruptions which can interfere with the ability of the financial sector to intermediate financial flows might be expected to restrain economic activities. Banks take deposits of short maturity and channel same to investors for a long maturity to pay. This maturity mismatch exposes the banks to transformation and asset risks which if not properly managed may create shocks capable of triggering panics that could lead to distress [87]. A Shock from a single bank when not promptly and adequately

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Methods

Results

Discussion

Conclusion