Bank’s Liquidity and Stability: An Endogenous Examination

Abstract

This study investigated the impact of banks’ liquidity on banks’ stability in Nigeria for the period 2004–2023. The ex-post facto research design was adopted, utilizing secondary data sourced from the annual financial reports of selected banks, the Nigeria Deposit Insurance Corporation (NDIC), and the Central Bank of Nigeria (CBN) statistical bulletins. Bank stability, measured by the Zscore, served as the dependent variable, while liquidity indicators—Cash-to-Capital Reserve (CCR), Loan-to-Deposit Ratio (LDR), and Asset-to-Government Securities (AGS)—were the independent variables. The Auto-Regressive Distributed Lag (ARDL) model was employed to analyze both the short-run and long-run relationships among the variables. The results revealed that CCR and AGS have significant positive impacts on bank stability, while LDR has a negative but insignificant effect in the long run. This indicates that adequate liquidity reserves and asset growth enhance the long-term stability of banks in Nigeria. The study concludes that effective liquidity management and prudent asset diversification are key drivers of bank stability. It recommends that Nigerian banks maintain optimal liquidity buffers, diversify asset portfolios, and strengthen regulatory compliance to ensure resilience and sustainable financial stability