Investigation of the impact of capital adequacy on bank stability in Nigeria: A panel data analysis

Abstract

One essential factor that drives the financial system is the stability of the banking industry, particularly in developing economies like Nigeria, where macroeconomic volatility and credit risk remain prevalent. To ensure the banking system continually supports the economy, this study examines the impact of capital adequacy on the stability of deposit money banks in Nigeria. In this study, Fixed Effects and Dynamic Ordinary Least Squares are employed to analyse panel data from 11 Nigerian banks from 2014 to 2023. The results indicate that the capital adequacy ratio, liquidity ratio, and bank size have a positive and significant impact on banking stability in Nigeria. The result indicates a persistent level of bank resilience, underscoring the need to ensure a stable banking system. Asset quality, inflation, and interest rates adversely affected bank stability in Nigeria. Similarly, the cost-income ratio has a significant impact on banking stability. In light of these findings, the study recommends that the regulatory authority should enhance oversight, particularly in the area of loans. Finally, the regulator should keep pace with the recapitalisation reforms in the banking sector to make Nigerian banks more stable, thereby boosting public confidence and supporting economic growth.