Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach

Adolphus Joseph Toby; Jibaniya Katon Danjuma

doi:doi:10.11648/j.ijfbr.20210704.12

| Peer-Reviewed

Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach

Adolphus Joseph Toby, Jibaniya Katon Danjuma

Published in International Journal of Finance and Banking Research (Volume 7, Issue 4)

Received: 21 June 2021 Accepted: 24 August 2021 Published: 10 September 2021

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

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.

Published in	International Journal of Finance and Banking Research (Volume 7, Issue 4)
DOI	10.11648/j.ijfbr.20210704.12
Page(s)	95-100
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), 2021. Published by Science Publishing Group

Keywords

Financial Distress Resolution, Capital Adequacy Regulation, ARDL

References

[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 system. 6 (1), 99-109.
[3]	Altunbas, Y., Binici, M., & Gambacorta, L. (2018). Macroprudential policy and bank risk. Journal of International Money and Finance, 81 (5), 203-220.
[4]	Amahalu, N., Okoye, E. I., Nweze, C., Chinyere, O., & Christian, O. (2017, July). Effect of capital adequacy on financial performance of quoted deposit money banks in Nigeria.
[5]	In Chapter 57 in the proceedings of the 2017 International Conference on African Entrepreneurship and Innovation for Sustainable Development (AEISD).
[6]	Ashraf, N., & Butt, Q. U. A. (2019). Macroeconomic and Idiosyncratic Factors of Non-Performing Loans: Evidence from Pakistan’s Banking Sector. Journal of Finance and Accounting Research, 1 (2), 44-71.
[7]	Barrell, R., Davis, E. P., Karim, D., & Liadze, I. (2010). Bank regulation, property prices and early warning systems for banking crises in OECD countries. Journal of Banking & Finance, 34 (9), 2255-2264.
[8]	Bitar, M., Pukthuanthong, K., & Walker, T. (2018). The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of International Financial Markets, Institutions and Money, 53, 227-262.
[9]	Buehler, K., Samandari, H., & Mazingo, C. (2009). Capital ratios and financial distress: lessons from the crisis (No. 15). Working Paper.
[10]	Calem, P., & Rob, R. (1999). The impact of capital-based regulation on bank risk taking. Journal of Financial Intermediation, 8 (4), 317-352.
[11]	Chiaramonte, L., & Casu, B. (2017). Capital and liquidity ratios and financial distress. Evidence from the European banking industry. The British Accounting Review, 49 (2), 138-161.
[12]	Glaessner, T., & Mas, I. (1995). Incentives and the resolution of bank distress. The World Bank Research Observer, 10 (1), 53-73.
[13]	Kcharem, N. (2014). Analysis of Basel III capital requirements repercussions on the financial sector and the real economy. Unpublished MSc. Thesis. Aarhus University.
[14]	Kinyariro, D. K., Meeme, M. M., Maina, J. N., & Muriithi, M. J. (2016). Implications of Basel III accord adherence on financial distress status of commercial banks in Kenya.
[15]	Mayes, D. G., & Stremmel, H. (2014). The effectiveness of capital adequacy measures in predicting bank distress: SUERF Study 2014/1. Brussels: Larcier.
[16]	Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 48 (3), 261-297.
[17]	Newey, W. K., & West, K. D. (1987). Hypothesis Testing with Efficient Method of Moment Estimation? International Economic Review, 28 (3), 777-787.
[18]	Olukotun, G. A., & James, O. O. (2013). Bank distress in Nigeria and the Nigeria deposit insurance corporation intervention. Global Journal of Management and Business Research, 13 (8), 1-11.
[19]	Sharpe, W. F. (1977). Bank capital adequacy, deposit insurance and security values, part I (No. w0209). National Bureau of Economic Research.
[20]	Weber, R. F. (2010). New governance, financial regulation, and challenges to legitimacy: The example of the internal models approach to capital adequacy regulation. Administrative Law Review, 7 (2), 783-869.
[21]	Yousef. P., Mohammed, M. O, and 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), 167-181.

Cite This Article

Plain Text BibTeX RIS

APA Style

Adolphus Joseph Toby, Jibaniya Katon Danjuma. (2021). Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach. International Journal of Finance and Banking Research, 7(4), 95-100. https://doi.org/10.11648/j.ijfbr.20210704.12

Copy | Download

ACS Style

Adolphus Joseph Toby; Jibaniya Katon Danjuma. Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach. Int. J. Finance Bank. Res. 2021, 7(4), 95-100. doi: 10.11648/j.ijfbr.20210704.12

Copy | Download

AMA Style

Adolphus Joseph Toby, Jibaniya Katon Danjuma. Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach. Int J Finance Bank Res. 2021;7(4):95-100. doi: 10.11648/j.ijfbr.20210704.12

Copy | Download

@article{10.11648/j.ijfbr.20210704.12,
  author = {Adolphus Joseph Toby and Jibaniya Katon Danjuma},
  title = {Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach},
  journal = {International Journal of Finance and Banking Research},
  volume = {7},
  number = {4},
  pages = {95-100},
  doi = {10.11648/j.ijfbr.20210704.12},
  url = {https://doi.org/10.11648/j.ijfbr.20210704.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20210704.12},
  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.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach
AU  - Adolphus Joseph Toby
AU  - Jibaniya Katon Danjuma
Y1  - 2021/09/10
PY  - 2021
N1  - https://doi.org/10.11648/j.ijfbr.20210704.12
DO  - 10.11648/j.ijfbr.20210704.12
T2  - International Journal of Finance and Banking Research
JF  - International Journal of Finance and Banking Research
JO  - International Journal of Finance and Banking Research
SP  - 95
EP  - 100
PB  - Science Publishing Group
SN  - 2472-2278
UR  - https://doi.org/10.11648/j.ijfbr.20210704.12
AB  - 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.
VL  - 7
IS  - 4
ER  -

Copy | Download

Author Information

Adolphus Joseph Toby

Department of Banking and Finance, Rivers State University, Port Harcourt, Nigeria
Jibaniya Katon Danjuma

Department of Banking and Finance, Rivers State University, Port Harcourt, Nigeria

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Adolphus Joseph Toby, Jibaniya Katon Danjuma. (2021). Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach. International Journal of Finance and Banking Research, 7(4), 95-100. https://doi.org/10.11648/j.ijfbr.20210704.12

Copy | Download

ACS Style

Adolphus Joseph Toby; Jibaniya Katon Danjuma. Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach. Int. J. Finance Bank. Res. 2021, 7(4), 95-100. doi: 10.11648/j.ijfbr.20210704.12

Copy | Download

AMA Style

Adolphus Joseph Toby, Jibaniya Katon Danjuma. Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach. Int J Finance Bank Res. 2021;7(4):95-100. doi: 10.11648/j.ijfbr.20210704.12

Copy | Download

@article{10.11648/j.ijfbr.20210704.12,
  author = {Adolphus Joseph Toby and Jibaniya Katon Danjuma},
  title = {Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach},
  journal = {International Journal of Finance and Banking Research},
  volume = {7},
  number = {4},
  pages = {95-100},
  doi = {10.11648/j.ijfbr.20210704.12},
  url = {https://doi.org/10.11648/j.ijfbr.20210704.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20210704.12},
  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.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - Capital Adequacy Regulation and Financial Distress Resolution in the Nigerian Banking Industry: An ARDL Approach
AU  - Adolphus Joseph Toby
AU  - Jibaniya Katon Danjuma
Y1  - 2021/09/10
PY  - 2021
N1  - https://doi.org/10.11648/j.ijfbr.20210704.12
DO  - 10.11648/j.ijfbr.20210704.12
T2  - International Journal of Finance and Banking Research
JF  - International Journal of Finance and Banking Research
JO  - International Journal of Finance and Banking Research
SP  - 95
EP  - 100
PB  - Science Publishing Group
SN  - 2472-2278
UR  - https://doi.org/10.11648/j.ijfbr.20210704.12
AB  - 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.
VL  - 7
IS  - 4
ER  -

Copy | Download