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.
| Published in | Journal of Finance and Accounting (Volume 9, Issue 4) |
| DOI | 10.11648/j.jfa.20210904.16 |
| Page(s) | 154-171 |
| Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
| Copyright |
Copyright © The Author(s), 2024. Published by Science Publishing Group |
Financial Distress Resolution, Liquidity Management, BASEL Capital Adequacy, ARDL
| [1] | Acharya, V. V (2003). Is the International Convergence of Capital Adequacy Regulation Desirable? The Journal of Finance, 58 (6), 2745-2782. |
| [2] | Adeyemi, B. (2011). Bank failure in Nigeria: A consequence of capital inadequacy, lack of transparency and non-performing loans. Banks and Bank systems, 6 (1), 99-109. |
| [3] | Aliero, H. M., Gatawa, N. M., & Kabiru, A. (2016). The Role of Capital Ratios in Predicting Bank Distress: Evidence from the Nigerian Banks. Advances in Social Sciences Research Journal, 3 (1), 25-40. |
| [4] | Allen, F., & Santomero, A. (1998). The Theory of Financial Intermediation. Journal of Banking and Finance, 21, 1461-1485. |
| [5] | Altman, E. I. (1983). Bankruptcy Costs and the New Code. Journal of Finance. 38 (2), 517-522. |
| [6] | Altunbas, Y., & Binici, M., Gambacorta, L. (2018). Macroprudential policy and Bank Risk. Journal of International Money and Finance, 81, 203-220. |
| [7] | Amahalu, N., Okoye, E. I., Nweze, C., Chinyere, O., & Christian, O. (2017). Effect of Capital Adequacy on Financial Performance of Quoted Deposit Money Banks in Nigeria. In Chapter 57 in the Proceedings of 2017 International Conference on African Entrepreneurship and Innovation for sustainable Development (AEISD). |
| [8] | Angeloni, I., & Faia, E. (2013). Capital Regulation and Monetary Policy with Fragile Banks. Journal of Monetary Economics, 60 (3), 311-324. |
| [9] | Ashraf, N., & Butt, Q, U. A. (2019). Macroeconomic and Idiosyncratic Factors of Non-Performing Loans: Evidence from Pakistani’s Banking Sector. Journal of Finance and Accounting Research, 1 (2), 44-71. |
| [10] | Ayoola, T. J., & Obokoh, L. (2018). Corporate Governance and Financial Distress in the Banking Industry: Nigerian Experience. Journal of Economics and Behavior Studies, 10 (1), 182-193. |
| [11] | Barrel, R., Davies, E., Karim, D., & Liadze, I. (2010). Bank Regulation, Property Prices and Early Warning Systems for Banking Crises in OECD Countries. Journal of Banking and Finance, 34 (9), 2255-2264. |
| [12] | Basel Committee on Banking Supervision (2010b). Calibrating Regulatory Minimum Capital Requirements and Capital Buffers: A Top-Down Approach. Bank for International Settlements. www.bis.org |
| [13] | Basel Committee on Banking Supervision (2013). Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools. Bank for International Settlements, Basel.. www.bis.org |
| [14] | Basel Committee on Banking Supervision (2014). Basel III: The Net Stable Funding Ratio. Bank for International Settlements. www.bis.org |
| [15] | Basel Committee on Banking Supervision, (2000). A New Capital Adequacy Framework: Pillar 3 – Market Discipline. Bank for International Settlements. www.bis.org |
| [16] | Basel Committee on Banking Supervision, (2009). Strengthening the Resilience of the Banking Sector. Bank for International Settlements. www.bis.org |
| [17] | Basel Committee on Banking Supervision, (2010d). Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems. Bank for International Settlements.www.bis.org |
| [18] | Bernanke, B. S. (1983). Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression. The American Review, 73 (3), 257-267. |
| [19] | Bitar, M., Pukthuanthong, K., & Walker, T. (2018). The Effect of Capital Ratios on the Risk and Efficiency and Profitability of Banks: Evidence from OECD Countries. Journal of International Financial Markets, Institutions and Money, 53, 227-262. |
| [20] | Bordo, M., & Landon-Lane, J. (2010). The Global Financial Crisis of 2007-08: Is it Unprecedented? National Bureau of Economic Research Working paper no 16589. |
| [21] | Bouattour, L., & Khouaja, D. (2016). Could Basel III Capital and Liquidity Requirements Avoid Bank Failure?. The International Journal of Business and Finance Research, 10 (4), 63-71. |
| [22] | Bryman, A. (2012). Sampling in Qualitative Research. Social Research Methods, 4, 415-429. |
| [23] | Buehler, K., Samandari, H., & Mazingo, C. (2009). ‘Capital Ratios and Financial Distress: Lessons from the Crisis. McKINSEY Working Papers on Risk. 1-15. |
| [24] | Calem, P., & Rob, R. (1999). The Impact of Capital Based Regulation on Bank Risk-Taking. Journal of Financial Intermediation, 8 (4), 317-352. |
| [25] | Calomaris, C. W., & Mason, J. R. (2003). Fundamentals, Panics and Bank Distress during Depression. American Economic Review 93 (5), 1615-47. |
| [26] | Campbell, J. Y., Hilscher, J., & Szilagyi, J. A. N. (2005). In Search of Distress Risk. The Journal of Finance, 63 (6), 2899-2939. |
| [27] | Carlson, M. A., Thomas, B. K., & Kurt, F. L. (2008). Distress in the Financial Sector and Economic Activity, Financial Economics Discussion Series. Divisions of Research and Statistics and Monetary Affairs, Federal Reserve Board, Washington D.C. |
| [28] | Caruana, J. (2010A). Systemic Risk: How to Deal with it. Bank for Intentional Settlements. |
| [29] | Chiaramonte, L., & Casu, B. (2017). Capital and Liquidity Ratios and Financial Distress. Evidence from European the European Banking Industry. The British Accounting Review, 49 (2), 138-161. |
| [30] | Christiano, L. J., Motto, R., & Rostagno, M. (2004). The Great Depression and the Friedman Schwartz Hypothesis. National Bureau of Economic Research Working Paper Series. |
| [31] | Coleman, T. P. (2019). Milton Friedman, Anna Schwartz, and A Monetary History of the US. Harris School of Public Policy, University of Chicago. |
| [32] | Crockett, A. (1997). Why is Financial Stability a Public Policy Goal? Federal Reserve Bank of Kansas City. Economic Review, 4, 5-55. |
| [33] | De Nicolo, G., Dell’Ariccia, G., Leaven, L., & Valencia, F. (2010). Monetary Policy and Bank Risk Taking. SSRN 1654582. |
| [34] | Diamond, D. W., & Rajan, R. G. (2002). Bank Bailout and Aggregate Liquidity. American Economic Review, 92 (2), 38-41. |
| [35] | Diamond, D. W., & Rajan, R. G. (2005). Liquidity Shortages and Banking Crisis. The Journal of Finance, 69 (2), 615-647. |
| [36] | Dirk, S. (1999). Contagion Risk in Banking. London School of Economics and Political Science, Financial Markets Group. |
| [37] | Dickey, D. A., & Fuller, W. A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica: Journal of the Econometric Society, 49 (4) 1057-1072. |
| [38] | Durbin, J. W., & Watson, G. S. (1950). Testing for Serial Correlation in Least Squares Regression I. Biometrika, 37 (3-4), 409-428. |
| [39] | Durbin, J. W., & Watson, G. S. (1951). Testing for Serial Correlation in Least Squares Regression. II Biometrika, 38 (2), 159-177. |
| [40] | Durbin, J. W., & Watson, G. S. (1971). Testing for Serial Correlation in Least Squares Regression. III Biometrika, 58 (1), 1-19. |
| [41] | Ebhodaghe, J. U. (1997). Financial Distress and Failure Resolution. Nigeria Deposit Insurance Corporation Quarterly, 7, 3-4. |
| [42] | Edem, D. B. (2017). Liquidity management and performance of Deposit Money Banks in Nigeria (1986–2011): An investigation. International Journal of Economics, Finance and Management Sciences, 5 (3), 146-161. |
| [43] | Ereza, A., Esat, D., Qazim, T., & Nexhat. K. (2014). Empirical analysis of Basel III effects in interest rate on the Kosovo banking system. European the Science Journal, 10, 259-270. |
| [44] | Ehud, I. R., & Avinash, K. V. (1989). Risk-Based Capital Adequacy Standards for a Sample of 43 Major Banks. Journal of Banking and Finance, 13, (1), 21-29. |
| [45] | Friedman, M., & Schwartz A. J. (1963). Monetary History of the United States, 1857-1960, Princeton University Press, Princeton NJ. |
| [46] | Galati, G., & Moessner, R. (2013). Macroprudential Policy-A Literature Review. Journal of Economic Surveys, 27 (5), 846-878. |
| [47] | Gaston, A. G., & Ingmar, S. (2017). An Empirical Study on the Impact of Basel III Standards on Banks’ Default Risks: The Case of Luxembourg. Central Bank of Luxembourg, BCL working papers 79. |
| [48] | Giordana, G., & Schumacher, I. (2011). The Impact of the Basel III Liquidity Regulations on the Bank Lending Channel. Papers 61, Central Bank of Luxembourg. |
| [49] | Glaessner, T., & Ignacio. M. (1995). Incentives and the Resolution of Bank Distress. The World Bank Research Observes, 10 (1), 53-73. |
| [50] | Goodhart, L. M (2015). Brave New World? Macroprudential Policy and the New Political Economy. Review International Political Economy, 22 (2), 280-310. |
| [51] | Granger, C. W. J. (1969). Investigating Causal Relationships by Econometric Models and Cross Spectral Methods. Econometrica: Journal of Econometric Society, 424-438. |
| [52] | Hannan, E. J., & Quinn, B. G. (1979). The Determination of the Order an Autoregression. Journal of the Royal Statistical Society, Series B (Methodological), 41 (2), 190-195. |
| [53] | Harris, M., & Raviv, A. (1991). The Theory of Capital Structure. The Journal of Finance, 4 (1), 297-355. |
| [54] | Idowu, E. (2014). Is Increasing Bank Capital the Solution to Improving Bank Liquidity and Preventing Bank Distress in Nigeria. Universal Journal of Applied Science, 2 (4), 83-91. |
| [55] | Jhingan, M. L. (2004). Macro-Economic Theory. 11th Revised Edition Vrinda Publication Ltd. |
| [56] | Johnsen, T., & Melicher, R. W. (1994). Predicting Corporate Bankruptcy and Financial Distress: Information Value Added by Multinomial Logit Models. Journal of Economics and Business, 46, 269-286. |
| [57] | Kariuki, H. N. (1993). Interest Rate Liberalization and the Allocative Efficiency of Credit: Some Evidence from the Small and Medium Scale Industry in Kenya, Brighton: Institute of Development Studies. University of Sussex. |
| [58] | Kariuki, H. N. (2013). The Effect of Financial Distress of Financial Performance of Commercial Banks in Kenya. University of Nairobi. |
| [59] | Kaufman, G. J. (1985). Bank Runs Benefits and Costs. Cato Journal, 7 (3), 559-582. |
| [60] | Kcharem, N. (2014). Analysis of Basel III capital requirements repercussions on the financial sector and the real economy. Unpublished MSc. Thesis. Aarhus University. |
| [61] | Kilian, L., & Barsky, R. B. (2001). Do we really know that Oil Caused the Great Stagflation? A Monetary Alternative. NBER Macroeconomics Annual, 16, 137-183. |
| [62] | Kim, D., and Samtomero, A. M. (1988). Risk in Banking and Capital Regulation. The Journal of Finance, 43 (5), 1219-1233. |
| [63] | Kinyariro, D. K., Meeme, M. M., Muriithi, M. J., & Maina, J. N. (2016). Implications of Basel III Accord Status of Commercial Banks in Kenya. International Journal of Economics Commerce and Management, 4 (7), 691-705. |
| [64] | Kothari, C. R. (2004). Research Methodology. In Jaipur (Ed.), Research Methodology. New Delhi: New Age International Limited publishers. |
| [65] | Liadze, I., Barell, R., Karim, D., & Davis, E. P. (2010). Bank Regulation, Property Prices and Early Warning Systems for Banking Crises in OECD Countries, 2255-2264. |
| [66] | Mayes, D. G., and Stremmel, H. (2014). The Effectiveness of Capital Adequacy Measures in Predicting Bank Distress. SURF Study, 2014/1, Brussels Larcier. |
| [67] | Miles, D. (1995). Optimal Regulation of Deposit Taking Financial Intermediaries. European Economic Review, 39 (7), 1365-13884. |
| [68] | Milne, A. (2001). Minimum capital requirements and the design of the new Basel Accord: a constructive critique. Journal of Financial Regulation and Compliance, 9 (4), 312-326. |
| [69] | Miron, J. A. (1994). Empirical Methodology in Macroeconomics: Explaining the Success of Milton Friedan and J. Schwartz’s: A Monetary History of the United States, 1867-1960. Journal of Monetary Economic, 34 (1), 17-25. |
| [70] | Mishkin, F. S. (2010). Monetary Policy Flexibility Risk Management and Financial Disruptions. Journal of Asian Economics, 21 (3), 242-246. |
| [71] | Modigliani, F., & Miller, M. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48, 261-97. |
| [72] | Morris, S., & Shin, H. Y. (2000). Rethinking Multiple Equilibria in Macroeconomic Modeling, Yale University. Cowles Foundation Discussion Paper, 1260. |
| [73] | Newey, W. K., & West, K. D. (1987). Hypothesis Testing with Efficient Method of Moment Estimation? International Economic Review, 28 (3), 777-787. |
| [74] | Nnanna, O. J. (2003). Liquidity Management: Just how much Liquidity is Adequate? Being a Paper Presented at a Conference organized by Nigeria Money Market Association on Liquidity vs Profitability Conflict: The Real issues for Banks. www.expidsc.com/management.html. |
| [75] | Olukotun, G. A., James, O. O., & Olurunfemi, K. (2013). Bank Distress in Nigeria and the Nigeria Deposit Insurance Corporation Intervention. Global Journal of Management and Business Research Finance. 13 (8), 51-60. |
| [76] | Paroush, P. (1988). The Domino Effect and the Supervision of the Banking Systems. Journal of Finance, 43, 1207- 1215. |
| [77] | Riahi-Balkaoui, A. (1998). The Effects of the Degree of Internationalization on the Firm Performance. International business Review, 3, 315-321. |
| [78] | Riahi-Balkaoui, A. (1999). The Degree of Internalization and the Value of Key Firms: Theory and Evidence Auditing. Journal of International Accounting Taxation, 8 (1), 189-196. |
| [79] | Richardson, G. (2006). Bank Distress during the Great Depression: The Illiquidity-Insolvency Debate Revisited. The National Bureau of Economic Research Working Paper No. 12717. |
| [80] | Sanusi, L. S. (2011). Global Financial Meltdown and the Reforms in the Nigerian Banking Sector. CBN Journal of Applied Statistics, 2 (1), 93-108. |
| [81] | Schumpeter, J. A. (1934). The Theory of Economic Development: An enquiry into Profits, Capital, Credit, Interest and the Business Cycle. New Brunswick (USA) and London (UK): Transaction Publishers. |
| [82] | Schwarz, G. (1978). Estimating the Dimension of a model. Annals of Statistics, 6 (2), 461-464. |
| [83] | Sharpe, W. (1978). Bank Capital Adequate, Deposit Insurance and Security Values. Journal of Financial and Qualitative Analysis, 13 (4), 701-718. |
| [84] | Soludo, C. C. (2004). Consolidating the Nigerian Banking Industry to Meet the Development Challenges of the 21st Century. Being an address delivered to Special Meeting of the Bankers Committee held on the 6th of July, 2004 at CBN Headquarters Abuja.www.cenbank.org |
| [85] | Stiglar, G. (1970). The Optimum Enforcement of Laws. Journal of political economy, 78 (3), 526-36. |
| [86] | Temin, P. (1976). Did Monetary Forces Cause the Great Depression? New York Norton. |
| [87] | Toby, A. J. (2006). Banking System Soundness: Theory and Policy. Pearl Publishers, Port Harcourt Nigeria. |
| [88] | Toby, A. J. (2010). Global Financial Crisis and Bank Management Practices in Nigeria: Survey Findings. Journal of Financial Management and Analysis, 23 (2), 27-51. |
| [89] | Weber, R. G. (2010). New Governance, Financial Regulation and Challenges to Legitimacy: The Example of the Internal Models Approach to Capital Adequacy Regulation. Administrative Law Review, 783-869. |
| [90] | White, E. (1984). Reinterpretation of the Banking Crisis of 1930. Journal Economic History, 44, 119-138. |
| [91] | Wicker, E. (1996). The Banking Panics of the Great Depression. Cambridge, University press. |
| [92] | Yauri, N. M., Musa, J., & Kaoje, N. A. (2012). Bank Recapitalization in Nigeria: Resuscitating Liquidity or Forestalling Distress? International Journal of Business and Social Science, 3 (10), 12-17. |
| [93] | Yousef. P., Mohammed, M. O., & Nayyereh. J. (2015). The Impact of Basel III Regulation on Profitability of Banks and Loan Pricing in the United Arab Emirate. Elkasia Journal of Finance and Risk Management, 6 (l). 10-15. |
| [94] | Zopounidis, C., & Kosmidou, K. (2008). The determinants of banks' profits in Greece during the period of EU financial integration. Managerial Finance, 34 (3), 20-35. |
APA Style
Adolphus Joseph Toby, Jibaniya Katon Danjuma. (2021). Liquidity Management, Basel Capital Adequacy and Financial Distress Resolution in the Nigerian Banking Industry. Journal of Finance and Accounting, 9(4), 154-171. https://doi.org/10.11648/j.jfa.20210904.16
ACS Style
Adolphus Joseph Toby; Jibaniya Katon Danjuma. Liquidity Management, Basel Capital Adequacy and Financial Distress Resolution in the Nigerian Banking Industry. J. Finance Account. 2021, 9(4), 154-171. doi: 10.11648/j.jfa.20210904.16
AMA Style
Adolphus Joseph Toby, Jibaniya Katon Danjuma. Liquidity Management, Basel Capital Adequacy and Financial Distress Resolution in the Nigerian Banking Industry. J Finance Account. 2021;9(4):154-171. doi: 10.11648/j.jfa.20210904.16
Share This Article
Twitter
Linked In
Facebook
Copy
Download@article{10.11648/j.jfa.20210904.16,
author = {Adolphus Joseph Toby and Jibaniya Katon Danjuma},
title = {Liquidity Management, Basel Capital Adequacy and Financial Distress Resolution in the Nigerian Banking Industry},
journal = {Journal of Finance and Accounting},
volume = {9},
number = {4},
pages = {154-171},
doi = {10.11648/j.jfa.20210904.16},
url = {https://doi.org/10.11648/j.jfa.20210904.16},
eprint = {https://article.sciencepublishinggroup.com/pdf/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.},
year = {2021}
}
TY - JOUR T1 - Liquidity Management, Basel Capital Adequacy and Financial Distress Resolution in the Nigerian Banking Industry AU - Adolphus Joseph Toby AU - Jibaniya Katon Danjuma Y1 - 2021/08/09 PY - 2021 N1 - https://doi.org/10.11648/j.jfa.20210904.16 DO - 10.11648/j.jfa.20210904.16 T2 - Journal of Finance and Accounting JF - Journal of Finance and Accounting JO - Journal of Finance and Accounting SP - 154 EP - 171 PB - Science Publishing Group SN - 2330-7323 UR - https://doi.org/10.11648/j.jfa.20210904.16 AB - 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. VL - 9 IS - 4 ER -
Information
Email: