Are Nigerian banks vulnerable to oil price shocks? A stress test approach

Authors

A. T. Odu, Central Bank of Nigeria
A. R Sanusi, Ahmadu Bello University, Zaria

Publisher

Central Bank of Nigeria

Keywords

Macroprudential policy, stress testing, oil price, vector autoregressive model, Bank

Abstract

This study empirically examines the vulnerability of the Nigerian banking industry to extreme, but plausible, adverse oil price shocks. A structural vector autoregressive (SVAR-X) is adopted to achieve this objective. The study period covers 2007Q1 – 2020Q4. The simulations assess the asset quality performance of DMBs, using the NPLs, under three scenarios (baseline, adverse and severely adverse). The findings suggest that the entire banking industry, as well as individual DMBs, are vulnerable to adverse oil price shocks. Accordingly, the study recommends, strict compliance with the single obligor limit, by commercial banks, to mitigate adverse effects of volatilities in crude oil prices. However, due to data limitations the study cannot extend the analysis, to the impact of oil price shocks, on the capital adequacy of DMBs. Consequently, the need for further studies on this issue cannot be overemphasised.

Author Bio

A.T. Odu is a staff of the Central Bank of Nigeria, while Sanusi, A. is a Lecturer in the Economics Department, Ahmadu Bello University, Zaria.

Publication Title

Economic and Financial Review (EFR)

Issue

2

Volume

59

First Page

61

Last Page

88

Classification-JEL

C32, C53, E51

Recommended Citation

Odu, A. T., and Sanusi, A. R. (2021) Are Nigerian Banks Vulnerable to Oil Price Shocks? a stress test approach. CBN Economic and Financial Review (EFR), 59(2), 61-88.