Financial Soundness Indicators (FSIs), Financial crisis, Macroprudential regulation, ARDL, Nigeria.
The Financial soundness indicators compiled for Nigeria within the context of IMFs Financial Sector Assessment Programme has been proven to be capable of pre-empting financial crisis. Analysts, however, considered it imperative to further explore the characteristics of the indicators, particularly their relationship with other macroeconomic variables to enhance the understanding of its dynamics so as to improve on its usefulness. This study, as a maiden attempt, applies Autoregressive Distributed Lag (ARDL) approach to investigate the dynamic linkages between the indicators and selected macroeconomic variables covering the period 2007 Q1 to 2015 Q4. The results indicate that macroeconomic events dictate the state of health of the Nigeria financial system. While changes in the level of economic activities inversely affect capital adequacy, it is directly related to asset quality and banks' profitability. Asset quality deteriorates while inflation rises. Banks' returns diminish and asset quality wanes as exchange rate depreciates. The study, therefore, suggests immediate deployment of FSIs as a monitoring instrument in conjunction with the existing micro-prudential tools while efforts should continue to improve the compilation process to enhance their accuracy.
Yaaba, Baba N.
"Financial soundness indicators and macroeconomic variables: an empirical investigation of the dynamic linkages,"
Bullion: Vol. 40
, Article 2.
Available at: https://dc.cbn.gov.ng/bullion/vol40/iss1/2