Macro-Prudential Determinants of Financial Stability in Nigeria

Abstract

This study examined the macro-prudential factors that affected Nigerian banks' stability between 1990 and 2020. The key purpose was to examine the extent to which RGDP growth rate, Inflation Rate, Balance of Payment (% of Total Assets), capital adequacy ratio, liquidity ratio, and sensitivity to market risk have affected banks financial stability in Nigeria. The data for the study were obtained from the CBN Statistical Bulletin, Financial Stability Report, and Annual Reports of all DMBs in Nigeria. Since the unit root test confirmed that the study variables achieved stationary both at level and first difference, the data were subsequently analyzed using ARDL approach. The findings showed that both in the short and long run, the real gross domestic product growth rate had a statistically significant beneficial influence on financial stability. Only in the short run do the rates of inflation, capital sufficiency, and payment balances have a negative, significant impact on financial stability. At a 5 percent level, liquidity had a significant beneficial impact on financial stability, but sensitivity to market risk had a significant positive impact in the short run but a negative impact over the long run. The paper is original by extending previous studies to developing economies and incorporated a wide range of macro-prudential determinants proxies such as RGDP growth rate, Inflation Rate, Balance of Payment (% of Total Assets), capital adequacy ratio, liquidity ratio, and sensitivity to market risk against subsequent studies.