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Bullion

Keywords

Basel accord, Capital adequacy, Bank behaviour, Bank deposit, Credit risk

Abstract

The divergent views on the usefulness of capital adequacy ratio (CAR) in controlling the risk appetite of banks necessitates further research on its efficiency and effectiveness. Whereas proponents of CAR believe that it enhances the soundness and stability of the banking system, opponents contend that it can impedes on the intermediating capabilities of banks and possibly ignites credit crunch that could induce fall in the level of output. This study empirical verifies the infuence of CAR on the behavior of banks in Nigeria. The study adopts a system of simultaneous equation, in the tradition of Maraghni (2017) using Generalized Method of Moment (GMM) approach on micro-level annual data of banks in Nigeria from 2007 to 2018. The results reveal, amongst others, that capital adequacy ratio indeed moderates bank appetite for risk and, as a feedback, risk taking behavior of banks in-turn enhances capital adequacy ratio. The study concludes that there is the strong need for regulatory authorities to often monitor banks appetite for risk, particularly in period of economic booms to avoid excessive risk that could erode their capital during burst that could aggravate loan default.

Author Bio

Baba Nmadu Yaaba and Lailah Gumbi Sanusi are staff of Statistics Department of Central Bank of Nigeria

Publication Title

Bullion

Issue

2

Volume

44

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