Modeling Bank Capital Adequacy Dynamics and Liquidity Risk Management, Empirical Evidence from the Nigeria Commercial Banks

Dr. S. L. C. Adamgbo
Department of Banking & Finance Kenule Beeson Saro-Wiwa Polytechnic, Bori
Prof. A. J. Toby
Department of Banking & Finance Rivers State University, Nkpolu Oroworoku, Port Harcourt
Dr. A.A. Momodu
Department of Banking & Finance Rivers State University, Nkpolu Oroworoku, Port Harcourt
Prof. J.C. Imegi
Department of Banking & Finance Rivers State University, Nkpolu Oroworoku, Port Harcourt

Abstract

This study examines the effects of Capital adequacy on liquidity risk management practices in Nigeria. The secondary time series data were obtained from the annual reports of the fifteen (15) quoted commercial banks in Nigeria as compiled from the Nigeria Stock Exchange Fact book for the period 1989 to 2015. The independent variables capital adequacy are categorised under Tier I, Tier II to total risk assets, capital conservation buffer (CCB), Minimum total capital (MTC) and counter-cyclical Buffer (CCyB). The dependent variable Liquidity risk was modelled with the five variants of capital adequacy measures. The multivariate regression equation were specified and results obtained based on E-views version 9.0. The OLS and cointegration result shows existence of a short run and long run equilibrium relationship between LIQR and capital adequacy (CAR). The Unit root test shows that the variables were stationary at level and first difference i.e. 1(0) and 1(1). The VAR test indicates that fluctuations in liquidity risk are significantly influenced by capital adequacy measures. The granger-causality test shows a unidirectional link between liquidity risk and capital adequacy. The impulse response function (IRF) shows that liquidity risk responded negatively to capital adequacy measures. The variance decomposition results indicates that LIQR accounted for 78.73% of own shocks at the short run, while at the long run accounted for 14.76%, the rest of 86.34% were distributed among the capital adequacy measures with CCB accounted for the highest. This study concludes that transition to Basel III will further mitigate the concentration of liquidity risk and avert systematic failure in the Nigeria banking system. It is recommended that risk management should be a matter policy focus and priority among regulators and operators in Nigeria banking industry.

Abstract

This study examines the effects of Capital adequacy on liquidity risk management practices in Nigeria. The secondary time series data were obtained from the annual reports of the fifteen (15) quoted commercial banks in Nigeria as compiled from the Nigeria Stock Exchange Fact book for the period 1989 to 2015. The independent variables capital adequacy are categorised under Tier I, Tier II to total risk assets, capital conservation buffer (CCB), Minimum total capital (MTC) and counter-cyclical Buffer (CCyB). The dependent variable Liquidity risk was modelled with the five variants of capital adequacy measures. The multivariate regression equation were specified and results obtained based on E-views version 9.0. The OLS and cointegration result shows existence of a short run and long run equilibrium relationship between LIQR and capital adequacy (CAR). The Unit root test shows that the variables were stationary at level and first difference i.e. 1(0) and 1(1). The VAR test indicates that fluctuations in liquidity risk are significantly influenced by capital adequacy measures. The granger-causality test shows a unidirectional link between liquidity risk and capital adequacy. The impulse response function (IRF) shows that liquidity risk responded negatively to capital adequacy measures. The variance decomposition results indicates that LIQR accounted for 78.73% of own shocks at the short run, while at the long run accounted for 14.76%, the rest of 86.34% were distributed among the capital adequacy measures with CCB accounted for the highest. This study concludes that transition to Basel III will further mitigate the concentration of liquidity risk and avert systematic failure in the Nigeria banking system. It is recommended that risk management should be a matter policy focus and priority among regulators and operators in Nigeria banking industry.

How to Cite
Adamgbo, D. S. L. C., Toby, P. A. J., Momodu, D. A., & Imegi, P. J. (2019). Modeling Bank Capital Adequacy Dynamics and Liquidity Risk Management, Empirical Evidence from the Nigeria Commercial Banks. International Journal of Contemporary Research and Review, 10(07), 21563-21571. https://doi.org/10.15520/ijcrr.v10i07.715
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Jul 4, 2019
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How to Cite
Adamgbo, D. S. L. C., Toby, P. A. J., Momodu, D. A., & Imegi, P. J. (2019). Modeling Bank Capital Adequacy Dynamics and Liquidity Risk Management, Empirical Evidence from the Nigeria Commercial Banks. International Journal of Contemporary Research and Review, 10(07), 21563-21571. https://doi.org/10.15520/ijcrr.v10i07.715

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