African Journal of Business and Economic Development | ISSN: 2782-7658

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REGULATIONS AND STABILITY OF COMMERCIAL BANKS:

AN ESTIMATED PANEL DATA STUDY FROM NIGERIA

ZUKBEE SIRA AUSTIN

Department of Banking and Finance
Kenule Beeson Saro-Wiwa Polytechnic
Bori, Rivers State, Nigeria

ABSTRACT
This study examined regulation and stability of commercial banks in Nigeria. The objective is
to examine if regulation have any effect on the stability of commercial banks. Cross sectional
data was sourced from financial statement of 14 commercial banks from 2011-2020.
Liquidity was proxy for commercial bank stability while capital regulation, activity
regulation, ownership regulation, deposits insurance coverage and regulation of entry were
used as independent variables. After cross examination of the validity of the pooled effect,
fixed effect and the random effect, the study accepts the fixed effect model. Findings revealed
that 80 and 70 percent variation on liquidity of commercial banks can be traced to the
independent variables. Capital regulation, activity regulation, ownership regulation and
deposit insurance have positive effect on stability of Nigeria commercial banks while entry
regulation have negative effect on stability. The T-Statistics and the probability value justify
that ownership regulation and capital regulation have significant effect on commercial bank
stability while entry regulation, activity regulation and deposit insurance have negative effect
on commercial bank stability. From the regression summary, it concludes that regulation
have significant effect on commercial banks stability in [Link] recommendsthat
regulatory authorities should devise measures, policies and strategies of effective supervision
and ensure that all banking rules and regulations such as capital regulations are well
complied. Strategies should be formulated to enhance regulation of activities of commercial
banks. Activities that endanger the stability of commercial banks stability should be
discouraged. Section 21 of BOFIA Act should be complied with by the management of the
commercial banks. Nigeria Deposit Insurance Corporation should ensure that insured
commercial banks comply with the relevant laws guiding corporation.
Keywords: Regulations, Stability of Commercial Banks, Estimated Panel Data, Nigeria

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SECTION I: INTRODUCTION
The banking sector plays a significant role in the growth and development of any economy.
The banks are the transmission channels for monetary policy and enhance the realization of
macroeconomic and monetary policy goals. The intermediary function bridges the savings
and investment gap in the economy and facilitates an efficient payment system (Lucky,
2017). A sound banking system ensures the optimal allocation of financial resources.
Banking system stability is important as bank failure can undermine public confidence in the
system, force a sudden contraction in money supply, curtail savings and investment, induce a
collapse of the payment system and results in severe dislocation of the real sector (Toby,
2008), thus the aim of ensuring banking stability is to prevent costly banking system crises
and their associated adverse effect on the economy. A weak banking sector not only
jeopardizes the short and long-term sustainability of the economy but can be a source of
financial crisis which can result in economic crisis (Vaithilingm, Nairm and Samudram,
2015). A fragile banking sector places constraint on the monetary policy in the view of the
lender of last resort function of Central Bank of Nigeria.

Banking system stability is a matter of concern to the monetary authorities, the government
and attracts the attention of the multilateral financial institutions such as the International
Monetary Fund (IMF) and the World Bank. The idea to develop banking system indicators
was conceived by International Monetary Fund after the Asian Financial Crises in 1990
(Sunday and Sani, 2014) to monitor and ensure bank resilience to environmental shocks.
Conceptually, a stable banking system is a system where the individual banks accounting for
the most of the system’s transactions are solvent and meet capital adequacy requirements
(Toby, 2006). Banking system can also be considered stable if the banks are capitally
adequate; if the banks are liquid, high quality of assets and profitable to withstand monetary
and macroeconomic shocks and fall in the composite rate of 1 and 2 as specified by the
Federal Deposit Insurance Corporation. The ability to monitor banking presupposes for
analysis the current health and stability of the banking system and establishes the banking
system resilience to system shocks. Understanding the underlying factors that influence the
efficiency, performance, and stability of banking sectors is essential for bank executives,
central banks, bankers association, and other financial/regulatory authorities to help them
forge policies that improve the banking sector (Sufian et al., 2016).

The goal of bank regulation is to prevent or to reduce the probability of bank runs. The
motivation is easy to find, the statistical data shows occurrence of more than 100 systemic
bank crises with devastating consequences for economies all around the world since the
1970s’ (Barth, et al., 2013). In Nigeria, the history of banking regulation dates back to the
banking ordinance of 1952which empowered Central Bank of Nigeria the regulatory
functions in banking industry. Main regulatory objectives are connected to regulation of entry
of new domestic and foreign banks; restrictions on bank activities; safety net support;
disclosure of accurate comparable information; and government ownership (Ungureaunu,
2008).

However, one question that matters is that has regulation achieved its objectives”? An
examination of sector crisis revealed that despite various methods of regulation, banks crisis
continue reoccur. At the international level, policies have been put in place to avert the issue
of bank crises. In 1980, Basel I was introduced, in 1990, Basel II was introduced, in 2008
after the global financial crises; Basel III was introduced to regulate the banking industry to
achieve desired banking system soundness. The existence of Basel I, Basel II, and Basel III
could not serve as a remedy for bank failure. The subprime Asian financial crises and the

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global financial crises of 2007/2008 cast doubt on the importance of the Basel Capital
regulatory framework. In Nigeria, For instance, less than five years after the consolidation, in
2009 Central Bank of Nigerian Examination Team discovered that some Nigerian banks were
unsound. More banks failure in the regulated banking era than the free banking era. Twenty-
six (26) banks failed between 1930 to 1959 as against 36 between 1994 to 2003. Other
studies (Ugwuanyi, 2015; Osuagwu, 2014; Onaolapo&Ajala, 2013; Ozili, 2015) examined
regulation and commercial banks profitability, this study examines the effect of regulation on
Nigeria commercial banks stability.
SECTION II: LITERATURE REVIEW

Banking Stability
The concept of banking system stability is derived from the financial system stability
indicators with various studies on the micro and macro prudential determinants. A sound
banking system is a system in which individual banks accounting for most of the system’s
transactions are solvent and meet capital adequacy requirements (Toby, 2006). Banking
system is considered sound, if it is capitally adequate and can withstand monetary and
macroeconomic shocks in its operating environment.

Federal Deposit Insurance Cooperation Composite Ratings of Banking Stability

The Federal Deposit Insurance Corporation developed rating method of classifying banks
whether sound or not, composite ratings are based on a careful evaluation of an institution's
managerial, operational, financial, and compliance performance.

Composite 1
Banks in this group are sound in every respect and generally have components rated 1 or 2.
Any weaknesses are minor and can be handled in a routine manner by the board of directors
and management. The banking institutions are the most capable of withstanding the vagaries
of business conditions and are resistant to outside influences such as economic instability in
their operating environment. These banking institutions are in substantial compliance with
laws and regulations. As a result, these banks exhibit the strongest performance and risk
management practices relative to the institution's size, complexity, and risk profile, and give
no cause for supervisory concern.

Composite 2
Banks in this group are fundamentally sound. For a bank to receive this rating, generally no
component rating should be more severe than 3 (FDIC, 2012). Only moderate weaknesses are
present and are well within the board of directors' and management's capabilities and
willingness to correct. These banks are stable and are capable of withstanding business
fluctuations. These financial institutions are in substantial compliance with laws and
regulations. Overall risk management practices are satisfactory relative to the institution's
size, complexity, and risk profile. There are no material supervisory concerns and, as a result,
the supervisory response is informal and limited.

Composite 3
Banks in this group exhibit some degree of supervisory concern in one or more of the
component areas. These Banks exhibit a combination of weaknesses that may range from
moderate to severe; however, the magnitude of the deficiencies generally will not cause a
component to be rated more severely than 4. Management may lack the ability or willingness
to effectively address weaknesses within appropriate time frames. Banks in this group

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generally are less capable of withstanding business fluctuations and are more vulnerable to
outside influences than those institutions rated a composite 1 or 2. The above condition can
be traced to noncompliance with laws and regulations. Risk management practices may be
less than satisfactory relative to the institution's size, complexity, and risk profile. These
banks require more than normal supervision, which may include formal or informal
enforcement actions. Failure appears unlikely, however, given the overall stability and
financial capacity of these banks (FDIC, 2012).

Composite 4
Banks in this group generally exhibit unsafe and unsound practices or conditions. There are
serious financial or managerial deficiencies that result in unsatisfactory performance. The
problems range from severe to critically deficient. The weaknesses and problems are not
being satisfactorily addressed or resolved by the board of directors and management. Banks
in this group generally are not capable of withstanding monetary and macroeconomic shock
in the operating environment. Again this can be traced to noncompliance with laws and
regulations, excessive risk taking and insider dealings. Risk management practices are
generally unacceptable relative to the institution's size, complexity, and risk profile. Close
supervisory attention is required, which means, in most cases, formal enforcement action is
necessary to address the problems. Banks in this group pose a risk to the deposit insurance
fund. Failure is a distinct possibility if the problems and weaknesses are not satisfactorily
addressed and resolved.

Composite 5
Banks in this group exhibit extremely unsafe and unsound practices or conditions; exhibit a
critically deficient performance; often contain inadequate risk management practices relative
to the institution's size, complexity, and risk profile; and are of the greatest supervisory
concern. The volume and severity of problems are beyond management's ability or
willingness to control or correct. Immediate outside financial or other assistance is needed in
order for the Banks to be viable. Ongoing supervisory attention is necessary. Banks in this
group pose a significant risk to the deposit insurance fund and failure is highly probable.

Measures of Bank Stability

With the recommendation of the IMF, Central bank of Bosnia and Herzegovina began with a
compilation of selected FSI exclusively for the banking sector, primarily because the share of
this sector in the overall financial system. In order to calculate those indicators aggregation
and data consolidation were used. Aggregation is the summarization of data, so that the
overall position of one or transaction for any group of reporting units is equal to the sum of
data for all individual units within the group. Consolidation refers to the elimination of
transactions between group members in order to express financial situation and performance
of the group as one of the accounting subject in relation to other businesses outside the group,
for statistical purposes. Consolidation of data is carried out on a group and sector level.

Profitability
To measure profitability, compiled FSI is as follows:
a) Return on average assets (ROAA) is an indicator of a set of basic indicators of financial
soundness indicators and is intended to measure banks' efficiency in using its assets. This FSI
provides an estimate of profit that can be used to cover losses in relation to assets. ROAA is
calculated as the ratio of net income to average total assets (Lucky, 2017).

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b) Return on average equity (ROAE) measures the efficiency of banks in the use of capital.
This FSI provides an average income that can be used to cover losses in relative to capital.
ROAE is calculated as the ratio between net income and average capital.
c) Net interest income to total income is calculated as the ratio of net interest income and
total income. Net interest income is the difference between total interest income and total
interest expense.
d) Non-interest expenses to gross income measures the share of administrative costs in total
revenue. This FSI is calculated as the ratio of non-interest expense and total revenue. The
non-interest expenses include direct expense (cost value adjustments for items of the balance
of risk and risk reserves for items and other off-balance sheet business and direct expenses)
and operating expenses (salaries and expenses contributions, the cost of office space, other
fixed assets and overheads and other operating costs).

Capital Indicator
Indicators that measure capital adequacy are:
a) Basic capital to total risk weighted is used to determine how the indicator of net capital to
total risk weighted susceptible to changes in additional capital and regulatory reductions.
Capital adequacy is measured by this indicator is calculated as the ratio of basic capital (Tier
1) and total risk-weighted, which consists of RWA and operational risk weighted (ORW).
b) Net capital to total risk weighted corresponding to methodology capital adequacy ratio
(CAR) calculating, which is prescribed by Basel Core Principles for internationally active
banks in the G10 countries, except that the calculation and analysis of capital does not
include the impact of country risk and transfer risk. The capital adequacy ratio measured by
this indicator is calculated as the ratio of net capital and total risk-weighted.
c) Although the prescribed CAR for internationally active banks to Basel Core Principles is
8% or more, the existing regulations in Bosnia and Herzegovina require this rate to be at least
at 12%.

Liquidity
Financial soundness indicator: liquidity is:
a) Liquid assets to total assets show how the banking sector is sensitive to liquidity crisis, and
how it is able to meet the expected and unexpected demand for cash.
b) Liquid assets to short-term financial obligations as an indicator that measure liquidity
mismatches of assets and liabilities, and gives an indication of the extent to which banks can
withstand the withdrawal of short-term funds, and that they do not face with liquidity
problem.
c) Short-term liabilities to total liabilities are short-term measure of participation in the total
obligations, and represent a measure of liquidity risk caused by an unexpected increase in the share of
total short-term financial obligations. It is calculated as the ratio of short-term liabilities to total
liabilities (Lucky, 2017).

Asset Quality
To measure the quality of assets compiled FSI are as follows:
a) Non-performing assets (NPA) to total assets measures the asset quality of the banking
sector, and the participation of non-performing assets to total assets. NPLs accounted for the
largest portion of poor quality asset and therefore this indicator gives a good picture of the
quality of the loan portfolio.
b) NPA less net of provisions to the equity shows the proportion of non-performing assets not
covered by the provision of basic capital, and provides indications of additional provisions

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which could be taken to the existing NPA. It is important indicator of the ability of bank
capital to absorb losses arising from non-performing loans.
c) NPLs to total loans represent an indicator of basic set of FSI. It is calculated as the ratio
between the non-performing loans to total loans. This indicator is a measure of loans quality.

Bank Regulation
Financial regulation according to Eatwell (1998) is vexed, there is no commonly accepted set
of theoretical principles defining it, and that a major problem is building coherent theory of
regulatory practice is that potential scale of losses associated with extreme event.
Nonetheless, an attempt could be made to establish the components of financial regulation. It
is a set of specific rules or agreed behavior imposed by government or its agencies to be able
to control and guide the activities financial system for the achievement of desired objectives
(Chris, 2003).
From the forgoing, financial regulation serves as a hub to the efficiency and stability of
financial system (monetary stability). Financial institutions play a pivotal role in mobilizing
savings, and efficient transformation of savings into real capital for investment. Hence the
existence of a great number of risks inherent in the process of financial intermediation and
maturity transformation pose threat to the efficiency of financial system. Thus, to erect
confidence in the system characterized by volatile environment, financial regulation becomes
the catalyst for mitigating the existence of market failures arising from externalities, market
power and information problem (Chris, 2003).To achieve the intended objectives, the potency
of financial regulation and structure could be assessed by stability, efficiency and fairness
(Long and Vittas, 1992).

Capital Regulation
Since the inception of banking regulation in Nigeria, there has always been a directive issued
from time to time by the regulatory authorities on the minimum paid-up capital required
before a bank can be licensed to operate. The stipulated minimum paid-up capital
requirements over the years have witnessed a steady growth in amount since the first Nigeria
banking law was passed in 1952. The 1952 banking ordinance stipulated a minimum capital
of N25, 000 for indigenous and N200, 000 for expatriate commercial banks in the system.
This rose to N600, 000 and N1.05m for indigenous and expatriate banks respectively by the
1962 Act.

Theoretical approach focusing on bank regulation and supervision is emphasizing the positive
influence and importance of capital adequacy requirements. Capital, as regulation instruments
serve as a buffer against possible losses and hence diminish the occurrence of a failure
(Barth, et al., 2003). However, it is discussed in study of Chortareas et al. (2010), whether it
is precisely the implementation of capital requirements reducing the risk-taking incentives in
banks decision-making.

The minimum paid-up capital before 1991 was N20 million and by the provision of section 9
(2) of Bank and Other Financial Institution Decree (BOFID), the minimum start-up capital
rose to N50 million and in the 1997 budget it was increased to N500 million for both
commercial and merchant banks. Presently, the minimum start-up capital has been increased
from N2 billion in 2004 to a minimum of N25 billion. There is no doubt that the Basle
Accord influenced the bank recapitalization policy in Nigeria.

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Table1. Trend of Minimum Paid-up Capital of Banks in Nigeria (1952 – 2010)

Year Type of Bank Minimum Capital Requirement
1952 Commercial Banks £12,500.00
1969 Commercial Banks £300,000.00
1979 Commercial Banks Merchant Banks N600,000.00 N2,000,000.00
1988 (February) Commercial Banks Merchant Banks N5,000,000.00 N3,000,000.00
1988 (October) Commercial Banks Merchant Banks N10,000,000.00 N6,000,000.00
1989 Commercial Banks Merchant Banks N20,000,000.00 N12,000,000.00
1991 Commercial Banks Merchant Banks N50,000,000.00 N40,000,000.00
1997 Commercial Banks Merchant Banks N500,000,000.00 N500,000,000.00
2000 Commercial Banks Merchant Banks N1,000,000,000.00 N1,000,000,000.00
2001 Commercial Banks Merchant Banks N2,000,000,000.00 N2,000,000.000.00
2005 – till date Commercial Banks N25,[Link]
Source: Lucky and Akani (2017)

Capital regulation became the focus of banking regulation since consultations for the first
Basel accord began in 1988. The focal opinion was that more capital should make banking
institutions better able to absorb losses with their resources, without becoming insolvent or
requiring bailouts with public funds. On that account, regulatory consensus comes to view
capital as a tool for curbingrisk-taking created by limited liability and intensified by deposit
insurance and bailout expectations. Given recent happenings, the global financial
unquestionably indicated that existing capital regulation, in its design or implementation, was
inadequate in the prevention of panic in financial systems, which necessitated emergency
government intervention around the globe to prevent the collapse of banking institutions.
Moreover, a large proportion of the rescued institutions appeared to be in compliance with
minimum capital requirements shortly before and during the financial crisis (Demirguc-Kunt,
Detragiache, Tressel, 2008).
Fernandoand Herring(2001) opined that capital regulation is the flagship of financial
regulation because it is considered a means to mitigate the risk of bank failures and related
systemic adverse macroeconomic developments. However, the theoretical debate on the
effects of capital regulation (almost exclusively referring to capital requirements) and general
bank performance (profitability, efficiency, and stability) highlight both negative and positive
effects. Put differently literature offers two scenarios through which capital requirements may
influence systemic risk. Onthe one hand, capital requirement may likely reduce the individual
risk-taking behaviour of banking institutions and consequently aid to reduce systemic risk,
for the reason that individual risk is a significant driver of systemic risk. Banking institutions
response to capital requirements may promote linkage within the banking system, and as a
result, increase systemic risk. Thus, decreasing individual risk may not always concurrently
reduce overall systemic risk (Zhou, 2013).
Regulation of Certain Activities
In Nigeria section 20 states that a bank shall not, without the prior approval in writing of the
Bank, grant (a) to any person any advance, loan or credit facility or give any financial
guarantee or incur any other liability on behalf of any person so that the total value of the
advance, loan, credit facility, financial guarantee or any other liability in respect of the person
is at any time more than twenty per cent of the shareholders fund unimpaired by losses or in
the case of a merchant bank not more than fifty per cent of its shareholders fund unimpaired
by loses and for the purpose of this paragraph all advances, loans or credit facilities extended
to any person shall be aggregated and shall include all advances, loans or credit facilities

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extended to any subsidiaries or associates of a body corporate, provided that the provisions
of this paragraph shall not apply to transactions between banks or between branches of a bank
or to the purchase of clean or documentary bills of exchange, telegraphic transfers or
documents of title to goods the holder of which is entitled to payment for exports from
Nigeria or to advance made against such bills, transfers or documents; (b) any advances,
loans or credit facilities against the security of its own shares or any unsecured advances,
loans or credit facilities unless authorized in accordance with the bank’s rules and regulations
and where any such rules and regulations require adequate security, such security shall be
provided or, as the case may require, deposited with the bank.

The scope of activities helps define what is meant by a bank and since the scope of
permissible activities differs across countries, banks are not the same across countries (Bart et
al., 2013). It is the right of national regulators to give the license to banks and specify
permissible activities. The theoretical frameworks define different effects of these restrictions
on actual bank’s behavior and performance. As it is summarized in the study of Barth et al.
(2013), restrictions on banks’ activities may violate ability of banks to monitor and process
information about customers, building reputational capital, as well as limit the range of
services provided to customers. Restrictions in the scope and scale of banks’ activities
decrease the bank’s ability to diversify the income streams and it may disturb the value of a
bank which increases the incentives for bad behavior. Thirdly, the right of activity restrictions
in hands of national regulators can create a space for abuse of power through the discretion
right (Barth, et al., 2013).

On the contrary to the previous arguments implying negative relationship with the activity
regulations and the bank efficiency, we have also arguments that provide reasoning why are
these regulations needed. The ability of banks to engage in broad financial activities is
intensifying the moral hazard problems and enhancing the risk taking incentives in banks’
behavior (Crockett, 2011). The activity restrictions are also a tool ensuring that banks are not
able to develop into large and complex entities with strong position the market impossible to
monitor and to regulate too big to discipline as it is called in the study of Barth et al. (2013).

Deposit Insurance
Nigeria deposit insurance Act of 1989 as amended states that (1) The Corporation shall have
responsibility for- (a) insuring all deposit liabilities of licensed banks and such other deposit-
taking financial institutions (hereinafter referred to as "insured institutions) operating in
Nigeria within the meaning of sections 16 and 20 of this Act so as to en-gender confidence in
the Nigerian banking system; (b) giving assistance to insured institutions in the interest of
depositors, in case of imminent or actual financial difficulties particularly where suspension
of payments is threatened to avoid damage to public confidence in the banking system; (c)
guaranteeing payments to depositors, in case of imminent or actual suspension of payments
by insured institutions up to the maximum amount as provided for in section 20 of this Act;
(d) assisting monetary authorities in the formulation and implementation of banking policy so
as to ensure sound banking practice and fair competition among insured institutions in the
country; and (e) pursuing any other measure necessary to achieve the functions of the
Corporation provided such measures and actions are not repugnant to the objects of the
corporation.

Deposit insurance is an instrument providing depositors a guarantee that in the event of bank
problems they will receive a certain portion of the face value of their deposits. The risk of
illiquidity, following from the uncertainty about the depositors’ choice for the time and

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amount of their withdrawals is one of the main threats for the cause of bank runs. Deposit
insurance is used by many countries in order to prevent in order to prevent the bank runs and
decrease the risk of systemic crisis (Barth, et al., 2013). However, rich deposit insurance can
be misused and can encourage excessive risk taking by banks representatives as well as
decrease the attention of depositors to monitor the bank executives themselves. Thus, the
precise design of deposit insurance schemes, including coverage limits, scope 22% of
coverage, whether coinsurance is a feature, sources of funding, premium structure, and
management and membership requirements, may materially shape bank and depositor
behavior (Barth et al. 2013). The evidence in the work of Barth et al. (2004) has confirmed
the assumptions of theoretical approach about the risk in the design of deposit insurance
schemes. The generosity of the deposit insurance has a significant positive effect on the bank
fragility.

Regulation of New Bank

Section 2 of BOFIA states that any person desiring to undertake banking business in Nigeria
shall apply in writing to the Governor for the grant of a licence and shall accompany the
application with the following (a) a feasibility report of the proposed bank; (b) A draft report
of the memorandum and articles of association of the proposed bank; (c) A list of the
shareholders, directors and principal officers of the proposed bank and their particulars; (d)
The prescribed application fee and (e) such other information, documents and reports as the
Bank may, from time to time specify.
After the applicant has provided all such information, documents and report as the Bank may
require under subsection (1) of this section, the shareholders of the proposed banks shall
deposit with the bank a sum equal to the minimum paid-up share capital that may be
applicable under section 9 of this Act. (3) Upon the payment of the sum referred to in
Subsection (2) of this Section, the Governor may issue a licence with or without conditions or
refuse to issue a licence and the Governor need not give any reasons for the refusal. (4)
Where an application for a licence is granted, the Bank shall give written notice of that fact to
the applicant and the licence fee shall be paid. (5) An application for a licence shall be
forwarded to the Governor and all licences to be issued shall be with the prior approval of the
Minister.

Entry limitations are closely related to the ownership regulations especially the participation
of government in the ownership. National regulators regulate the degree of competition in the
market by the implementation of the entry barriers. It is the role and right of regulators in
every country to formulate and impose fair requirements and screen the possible entrants to
analyze whether they are proper and fit the market structure. The barriers of entry are
imposed in order to give the license to operate on the market only to those of higher quality
and hence enhance the overall performance of the banking industry (Barth, et al., 2013). The
evidence in the study of Barth et al. (2004) indicated that stronger restrictions on the entry
into banking sector are positively associated with costs; however there is no significant
relationship between restrictions and the overall performance of banking sector. However, the
limitation on the bank entry as well as the foreign ownership is positively associated with the
bank fragility and increase the probability of crises (Barth, et al., 2004).

Bank ownership
Bank ownership is one of the important characteristics influencing the performance and the
efficiency of banks. One aspect of government participation in the bank ownership can be
better possibility for bank regulation, closer supervision and monitoring through the

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participation in the shareholders’ board. In the theoretical approach there are different views
considering the government ownership. Firstly, it is considered that governments have the
access to the privileged information and good incentives taking into account social welfare.
These characteristics enable government to overcome or prevent from capital-market failures,
to utilize possible externalities as well as to support socially beneficial investments (Barth, et
al., 2004).

On the contrary, due to the privileged position of the government there is a danger that
government can act weaken the present regulatory policies and try to pursue policies
underlying to enhancing of politically attractive decisions. Political power in the financial
system can lead into decrease in efficiency through resource allocation, softens budget
constraints. A fairly common practice when banks are government owned is for the
government to use them as a vehicle for financing government-owned or otherwise favored
enterprises and projects. Under such circumstances, it should be no surprise that the
supervisory authorities are expected to play a supporting role and thus may overlook certain
problems (Barth et al., 2009).

The foreign-owned bank underlying also to the home country regulation and supervision
through its parental bank tends to operate on the market more efficiently, with lower
tendencies for risky practices. Additionally, the presence of foreign owned banks may
contribute to implementation of best practices used in the host country. The results in the
empirical study of Barth et al. (2004), show that countries with higher percentage of
government ownership are less financially developed and perform lower economic growth
resulting from less developed and less stable and efficient financial markets.

Theoretical Framework
The idea of whether or not government and its agencies should intervene in financial matter
has been fairly treated in literature. In particular, using Keynes’ advocacy of direct and active
government intervention through the invisible hand of the public sector to strengthen and
enhance the flow of capital in the economy. This paper will adopt three working theories of
financial regulations, thus; agency theory, risk management theory and the regulatory
dialectic theory.
Agency theory as developed by Stiglitz in 1989 to justify the government goals of safety and
protection. Regulatory intervention is required for the protection of public savings when it is
threatened by the behavior of financial institutions. The main trust of this theory is that,
government agencies must be present to supervise and limit the excesses of financial
institutions toward customer safety and protection. The theory also focuses attention on the
problems of hidden actions and hidden information, what Sinkey (1992) called moral hazard
and adverse selection” respectively, to set strategies in order to circumvent the problems and
ensure safety and confidence of savers in the system.
The regulatory dialectic theory is based on the work of Kane (1981). This theory strives to
explain the ongoing struggle between the regulators and financial institutions. The regulators
attempt to impose constraints on the financial system (interest rate, product, geographic
control). The institutions who tend to be driven by profit or wealth maximization motives,
attempt to circumvent the restrictions because they consider such as structural arbitrage. This
process (contagion), create cost and benefit analysis for government officials leading to
reactive adjustment in operative codes of regulation. Kane’s theory examine the struggle
engage by both the regulators and the financial institutions to achieve their goals, in the

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process some adjustment emerged (exogenously) leading to regulatory changes toward

financial or monetary stability.

Empirical Review
Ndugbu and Ochiabuto (2015) examined the relationship between supervision and
survivability of banks. The study employs E-view statistical software using the two stage
least square method to evaluate a set of factors which affect bank survivability. Data for the
study were extracted from the Central Bank of Nigeria’s (CBN) statistical bulletin and bureau
of statistics publications (1981-2013). The results confirm positive significant relationship
among capital protection; earnings strength and bank liquidity while cash reserve ratio and
bank strength had negative impact on bank liquidity. These variables were found to be
inelastic due to time lag banks may take to adjust to supervision patterns, reforms and finding
alternatives. A short time frame given by the supervisory authority to implement a new
regulation by banks resulted to inelastic bank liquidity. The strength-supervision model
showed positive significant relationship among bank liquidity, asset quality and bank
strength.

Das, Quintynand Kina (2014) examined impact of regulatory governance on financial system
stability; they used multi-cross-sectional data of developing and developed countries and
applied Weighted Least-square Regression, found a significance influence of regulatory
governance on financial system soundness. Using variables reflecting macroeconomic
conditions, structure of the banking system and the quality of political institutions and public
sector governance. Iganiga (2010) examined the effect of financial reforms (regulation) on
the effectiveness of financial institutions with emphasis on banking sector, using data from
1986, and applying classical least square technique, found that the performance of the
financial sector has been greatly influence by the reforms. As domestic savings increase by
5% and capital base of firms rekindled public confidence and increasing savings by 3.6%.

Ningi and Dutse (2008) examined impact of CBN’s consolidation in the banking sector; they
found a significant difference as the CBN’s decision has changed the market structure,
increased the efficiency and reliability of banks, create opportunities for participants and
raised their intermediation potentials. Idowu and Babatunde (2010) investigated the effect of
financial reform on capital market, using time series data (1986-2010), applying Ordinary
Least Square Regression, found a negative relationship between the two variables, i.e.
financial reform deterred capital market development. Pasiouras et al. (2009) used the
financial data provided in bank scope and data for regulatory and supervision policies
collected by World Bank (1999, 2003) for 615 banks from 74 countries during the time
period 2000 and 2004, observed counter wise effect of capital requirements, described in the
first pillar of Basel II, on 10 these two types of efficiency measures. The results have shown a
positive impact has been shown on cost efficiency but a negative impact on profit efficiency.

Demirguc-Kunt et al. (2013) investigated the effectiveness of current regulatory capital

regulations and tested theories that support the use of capital regulation to curtail bank risk-
taking incentives and absorbing losses. They found support for the assertion that stronger
capital levels are important components during systemic crises. Therefore, suggesting that the
current focus on strengthening capital requirements is appropriate. Additionally, they found
that greater emphasis on higher quality capital’ in the form of tangible assets or Tier I capital
is justified. Fanti (2014) investigated the effects of capital accords introduced by the BIS
(Basel I, Basel II, and Basel III). The main result obtained suggested that the introduction of

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sufficiently high capital requirements is effective for the objective of maintaining or restoring
banking sector stability with heterogeneous and homogeneous banks’ expectations.

Berger & Bouwman (2013) examined the relationship between bank capital and different
facets of bank performance in normal times, and banking and market crisis periods for US
banks. Their study indicated that bank capital increases the probability of survival and market
share of small banking institutions at all times (normal times, banking crisis, and market
crisis). Additionally, they found that high capital levels help medium and large banking
institutions primarily during banking crises, and particularly during the one with relatively
limited government intervention, and the credit crunch of the early 1990s. In sum, they are of
the opinion that capital acts as an absorber of losses.

Deli & Hasan (2016) examined the effects of bank capital regulation on loan growth by using
bank-level data from 125 countries within the period of 1998 to 2011. The results indicated
that capital regulation only has a weak negative effect on loan growth. Moreover, the effect is
entirely offset when banks hold moderately high levels of capital. However, they found that
the components of capital requirements that have the most significant negative effect on loan
growth are those associated with the prevention of banks to utilize as capital borrowed funds
and assets other than cash or government securities. Lutz (2016) examined the effects of new
capital requirements for systematically important financial institutions (SIFI) proposed by the
U.S Federal Reserve. The results obtained indicated that the announcement to recapitalize
SIFI led to lower abnormal initial stock returns for the SIFI that then reverse and dissipate
after three days. Interestingly, the findings suggest that the increased capital requirements
proposal for large SIFIs had no impact on economic and financial market interest rates.

Guidara, Lai, Soumare, and Tchana (2013) investigated the cyclical behaviour of Canadian
banks’ capital buffers and evaluated its effect on banks’ risk and performance throughout
business cycles and about Canadian regulatory changes during the different Basel regimes.
They found that Canadian banks were well capitalized, which explains how they weathered
the recent global financial crisis. They found that bank capital buffers demonstrate positive
co-movements with business cycles. Conversely, their results did not show any strong
evidence that variations of banks’ capital buffer affect the exposure of banks to risk and
return on equity. Thus, the drive to hold excess capital buffer may be motivated by market
discipline.

Dagher, Dell’Ariccia, Laeven, Ratnovski, and Tong (2016) examined how various levels of
bank capital would have performed in past banking crises. They found that high
capitalizationcan absorb losses during banking crises, but decline fast once capitalization
attains15 –23 percent of risk-weighted assets. They suggested that protection against extreme
crises requires significantly more loss absorption capacity; however, such crises are rare.

Olajide, Asaolu & Jegede (2011) conducted a study to ascertain the impact of financial
reforms on the performance of Nigerian banks for the period of 1995 to 2004. In a bid to
determine the effects of regulatory policies of recapitalization, interest rate deregulation, and
exchange rate reforms, a pooled panel regression analysis was adopted. The results obtained
showed mixed effects on the net interest margin and profitability level of Nigerian banks. The
study, however, concluded that bank-specific characteristics disclosed significant positive
effects on the profitability and efficiency of banks, whereas the industry structure proxies
suggested not to have contributed significantly to the profitability and efficiency performance

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of Nigerian banks. In an attempt to examine the effect of changes in capital levels of Nigerian
banks.

Agbeja (2013) employed panel data from thirty-two (32) commercial banks for the period
1992 –2007. The results obtained indicated that capital base requirement was not effective in
reducing distress in the Nigerian banking industry. Agbeja opined that the minimum capital
requirement imposed by regulatory authorities was not sufficient. And as such, he suggested
that the CBN further increase the capital base of Nigerian banks to stimulate efficiency.
Yauri, Musa & Kaoje (2012) investigated the impact of capital regulation on bank liquidity
and financial distress in the Nigerian banking sector over a ten-year period (1997 –2006). The
sampled period includes four bank recapitalizations that took place in the Nigerian banking
sector from N50 million to N500 million in 1997; to N1 billion in 2001; to N2 billion in
2002; and to N25 billion in 2005. Employing a simple regression model, correlation analysis
and the product moment correlation analysis, they found that a relationship exists between an
increase in the minimum capital base of commercial banks and their liquidity and asset
quality as liquidity and asset quality tend to improve with recapitalization.

Nwankwo (2013) conducted a study that dwelled on the performance of the Nigerian banks in
relation to the banking consolidation exercise that culminated in 2005. The study empirically
investigated the effect pre and post bank consolidation performance of Nigerian banks on the
Nigerian economy using T-test. The study results suggested that banking consolidation
engineered mergers and acquisitions gave rise to improved bank performance regarding asset
quality, liquidity, and profitability, which in turn had positive effects on the economy. In
essence, the study implied that the banking sector contributed little to economic growth in
periods before the banking consolidation reforms, whereas the contribution of Nigerian banks
to economic growth increased in the post-banking consolidation period due to improved asset
quality, liquidity levels and profitability. Ezike & Oke (2013) investigated the impact of the
adoption of capital adequacy standards on the performance of Nigerian banks, using a mix of
three old generation banks (Pre-SAP) and three new generation (Post-SAP) banks within the
period of 2003 to 2007. The authors employed the ordinary least squares (OLS) estimation
technique to ascertain the effect of loans and advances, shareholders’ funds, total assets and
customer deposits, on earnings per share and profit after tax. The results indicated that capital
adequacy exerts a major influence on the performance of Nigerian banks. Additionally, they
opined that regulatory authorities increased the minimum capital requirement in line with the
Basel Accord framework recommendations, and the impact was positive.

Olalekan & Adeyinka (2013) sought to ascertain the effect of capital adequacy on the
profitability of deposit-taking banks in Nigeria. The study relied on primary data from a 76%
of 518 questionnaire responses obtained from bank staff and secondary data from published
financial statements of banks for the period of 2006 to 2010. The results from the analysis of
the primary data revealed a non-significant relationship between capital adequacy and
profitability of banks, whereas the analysis of secondary data indicated a positive and
significant relationship. They opined that the results implied that capital adequacy plays a
central role in the determination of profitability in the Nigerian banking sector. Ikpefan
(2013) investigated the effect of capital adequacy on the management and performance of
Nigerian commercial banks for the period of 1986 to [Link] study tried to capture the
relationship between bank capital and bank performance empirically. The study examined
how capital adequacy and bank performance have been improved by the recapitalization
exercise and the consolidation of the Nigerian banking sector. Using the ordinary least square

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regression method on a sample of fourteen (14) commercial Nigerian banks, the study
indicated that the capital adequacy ratio adopted (shareholders’ funds/total assets) which
measures the capital adequacy of banks (risk of default) has a negative effect on return on
assets (ROA). The study showed that the efficiency of management proxied by operating
expenses is negatively related to return on capital (ROC).The empirical studies examined in
this study focused more on bank regulation and profitability of commercial banks. This study
focused on regulation and commercial banks stability in Nigeria.

SECTION III: METHODOLOGY

Descriptive and longitudinal design was employed with a view to making statistical
inferences on the effect of regulation and commercial bank stability in Nigeria. A Sampling
frame of 14 quoted commercial banks was selected using random sampling techniques. The
required cross-sectional data were sourced from annual reports of the commercial banks from
2009-2018.

Analytical Framework and Empirical Model Specification

This analysis is carried out within a panel data estimation framework. The preference of this
estimation method is not only because it enables a cross-sectional time series analysis which
usually makes provision for broader set of data points, but also because of its ability to
control for heterogeneity and endogeneity issues. Hence panel data estimation allows for the
control of individual-specific effects usually unobservable which may be correlated with
other explanatory variables included in the specification of the relationship between
dependent and explanatory variables (Hausman and Taylor, 1981).
In order to circumvent these problems, panel estimation techniques of fixed and random
effects will be adopted in this study, in addition to the traditional pooled regression
estimation. Decisions will be made between the fixed and random effect models using the
Hausman specification test. The panel model for the study is specified based on the modified
model of Akeem, Edwin, Kiyanjui and Kayode (2014).

Yit  X ,it  Z ,i  it 1

Yit  X ' it Zi' it 2
Where:
Y = dependent variable
D = independent variable
o = intercept
i = coefficient of the explanatory variable
e = error term
I = cross-sectional variable
T = time series variable

Model Specification
Pooled regression specification
LIQi  o  1 CR1i  2 AR2i  2 DI3 it  3ONR4it  4 ER 5i 1it 3

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Fixed Effect Model Specification

LIQit o  1 CR1i  2 AR2i  2 DI3 it  3ONR4it  4 ER 5i  9i  1 i idum1it
4
Random effect model specification
LIQit  o  1 CR1i  2 AR2 i  2 DI3 it  3ONR4 it  4 ER 5 i  i  1it
5
Where
LIQ = Liquidity of commercial banks proxy by liquid assets to total loans and
advances
CR= Capital regulation measured by tier 1 plus tier 2 capital to total risk assets
AR = Activity regulation measured by liquidity ratio
DI = Deposit insurance measured by the variation on number deposit in NDIC
ONR = Regulation of ownership measured by ownership concentration
ER = Entry regulation measured by dummy variable of 1 for new entry and 0 for no
entry
et = Stochastic or disturbance/error term.
t = Time dimension of the variables
α0 = Constant or intercept.

Estimation Techniques
Panel unit root test result
The data were checked for the presence of unit root using the ADF Fisher Chi-Square and
Philiperon Fisher Chi-Square, which is based on the well-known Dickey–Fuller procedure.
The null hypothesis for these tests is that there is a presence of non-stationary series against
the alternative hypothesis of stationary series. The unit root test is important because non-
stationary series regression estimation leads to spurious regression estimations with the
wrong magnitude and sign of the parameter of the regressors, with wrongly inferred
implications. The study assumes an absence of a time trend; hence it is tested for stationarity
allowing for constant only. Stationarity denotes the non-existence of unit root. We shall
therefore subject all the variables to unit root test using the augmented Dickey Fuller (ADF)
test specified in Gujarati (2004) as follows.
m
yt  1 2yt 1  i  yt 1  Et 6
i 1
Where:
yt = change time t
yt1 = the lagged value of the dependent variables
t = White noise error term
If in the above 
=0, then we conclude that there is a unit root. Otherwise there is no unit
root, meaning that it is stationary. The choice of lag will be determined by Akaike
information criteria.

Decision Rule

t-ADF (absolute value) > t-ADF (critical value) : Reject Ho (otherwise accept H1)

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Note that each variable will have its own ADF test value. If the variables are stationary at
level, then they are integrated of order zero i.e 1(0). The unit root problem earlier mentioned
can be explained using the model:

Y= Yt-1 + I 7

Where Yt is the variable in question; i is stochastic error term. Equation (a) is termed first
order regression because we regress the value Y at time “t” on its value at time (t- 1). If the
coefficient of Yt-i is equal to 1, then we have a unit root problem (non-stationary situation).
This means that if the regression.

Y= Yt-1 + I 8

Is run and L is found to be equal to 1 then the variable Yt has a unit root (random work in
time series econometrics).If a time series has a unit root, the first difference of such time
series are usually stationary. Therefore to salve the problem, take the first difference of the
time series. The first difference operation is shown in the following model:

Y= (L-1) Yt-1 + I 9

Yt-1 + I 10

(Note:  =1-1= 0; where L =1; Yt = Yt - Yt-i) 11

Integrated Of Order 1 Or I(I)

Given that the original (random walk) series is differenced once and the differenced series
becomes stationary, then the original series is said to be integrated of order I or I (1).

Integrated of Order 2 Or I (2)

Given that the original series is differenced twice before it becomes stationary (the first
difference of the first difference), then the original series is integrated of order 2 or
1(2).Therefore, given a time series has to be differenced Q times before becoming stationary
it said to be integrated of order Q or I (q). Hence, non-stationary time series are those that are
integrated of order 1 or greater.

The null hypothesis for the unit root is: Ho: a = 1;

The alternative hypothesis is Hi: a <1.

We shall test the stationarity of our data using the ADF test.

Granger Causality Test

Thus, Granger causality test helps in adequate specification of model. In Granger causality,
test, the null hypothesis is that no causality between two variables. The null hypotheses is
rejected if the probability of F* statistics given in the Granger causality result is less than
0.05. The pair-wise granger causality test is mathematically expressed as:
n n
Yt  o   x1 y Yt 1  1x xt 1  u1 12
i 1 i 1

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and
n n
x dp   dpy Yt 1  dp1x x V
t o 1 y 1 113
i 1 i 1
Where xt and yt are the variables to be tested white ut and vt are the white noise disturbance
terms. The null hypothesis 1y  dp1y  0 , for all I’s is tested against the alternative
hypothesis 1x  0 and dp1y  0. if the co-efficient of 1x are statistically significant but that
of dp1y are not, then x causes y. If the reverse is true then y causes x. however, where both
co-efficient of 1x and dp1y are significant then causality is bi –directional.

SECTION IV: PRESENTATION OF RESULTS AND DISCUSSION OF FINDINGS

The following tables explain the dynamic relationship between regulation and stability of
commercial banks in Nigeria.
Table 1: Regression Results
Variable Coefficient Std. Error t-Statistic Prob.
Fixed Effect Regression Results
AR 0.136172 0.184779 0.736944 0.4626
ONR 0.101556 0.077020 1.318567 0.0098
CR 0.281553 0.172765 1.629687 0.0058
DI 0.193587 0.195210 0.991686 0.3233
ER -0.421159 0.995672 -0.422990 0.6731
C 47.06465 4.987661 9.436215 0.0000
Effects Specification
Cross-section fixed (dummy variables)
R-squared 0.800540
Adjusted R-squared 0.770868
F-statistic 26.97984
Prob(F-statistic) 0.000000
Durbin-Watson stat 2.129266
Random Effect Regression Results
AR 0.135859 0.183801 0.739163 0.4611
ONR 0.100944 0.076310 1.322812 0.0082
CR 0.223415 0.169662 1.316827 0.0001
DI 0.189510 0.194650 0.973593 0.3320
ER -0.462113 0.995240 -0.464323 0.6432
C 48.03021 5.783498 8.304699 0.0000
Effects Specification
S.D. Rho
Cross-section random 11.19640 0.7871
Idiosyncratic random 5.822809 0.2129
Weighted Statistics
R-squared 0.034471
Adjusted R-squared 0.001556
F-statistic 0.956806
Prob(F-statistic) 0.446781
Durbin-Watson stat 1.878836
R-squared 0.036896 Mean dependent var 46.60579
Sum squared resid 21326.97 Durbin-Watson stat 0.393084
Correlated Random Effects - Hausman Test
Equation: Untitled
Test cross-section random effects
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross-section random 23.839782 5 .0000

Source: Extract from E-view 9.0

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In view of the panel data, fixed effect and random effect regression were run and
subsequently, lagrangian multiplier test for random effects models was carried out. Hausman
specification test was then used to decide between the two results. The result from the
Hausman test revealed a Chi2 value of 23.839782 with p-value of 0.0000 that is statistically
significant. This implies that the test considered the fixed effect as the most appropriate
estimator.

The fixed effect model shows that the independent variable explains 80 and 77 percent
variation on the liquidity of Nigeria commercial banks over the periods covered in this study.
The F-statistics and the F-Probability validates that the model is significant. The β coefficient
of the variables shows capital regulation, assets quality regulation; ownership regulation and
deposit insurance have positive effect on liquidity of commercial banks. The T-Statistics and
the probability value justify that ownership regulation and capital regulation have significant
effect on commercial bank stability while other variables have no significant effect on the
dependent variable.
Table II: Test for Stationarity
Variables ADF - Fisher Chi-square/ PP - Fisher Chi-square Statistics Probability REMARK DECISION
LIQ ADF - Fisher Chi-square 69.5334 0.0000 Stationary Reject H0
PP - Fisher Chi-square 122.586 0.0000 Stationary Reject H0
CR ADF - Fisher Chi-square 80.8985 0.0000 Stationary Reject H0
PP - Fisher Chi-square 110.904 0.0000 Stationary Reject H0
ONR ADF - Fisher Chi-square 72.4680 0.0000 Stationary Reject H0
PP - Fisher Chi-square 177.331 0.0000 Stationary Reject H0
DI ADF - Fisher Chi-square 59.0337 0.0000 Stationary Reject H0
PP - Fisher Chi-square 123.968 0.0000 Stationary Reject H0
AR ADF - Fisher Chi-square 71.3774 0.0000 Stationary Reject H0
PP - Fisher Chi-square 185.634 0.0000 Stationary Reject H0
ER ADF - Fisher Chi-square 101.691 0.0000 Stationary Reject H0
PP - Fisher Chi-square 200.353 0.0000 Stationary Reject H0
Source: Extract from E-view 9.0
The table above presents the summary results of the ADF and PP panel unit root tests. The
results show that the null hypotheses of a unit root test for first difference series for all the
variables can be rejected at all the critical values indicating that the level series which is
largely time-dependent and non-stationary can be made stationary at the first difference and
maximum lag of one. Thus, the reduced form model follows an integrating order of 1(1)
process and is therefore a stationary process. It also reveals that the test of stationarity in the
residuals from the level series regression is significant at all lags. Furthermore, this indicates
that the regression is no more spurious but real. That is to say, all the variables are
individually stationary and stable. At this level, all the t-statistic became significant at 5
percent.

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Table III: Cross Section Specific Results

Phillips-Peron results (non-parametric)
Cross ID AR(1) Variance HAC Bandwidth Obs
ACCESS -0.589 8.439879 4.416199 8.00 9
ECOBANK -0.635 5.299897 2.909330 4.00 9
FCMB -0.447 2.703935 0.480026 6.00 9
FIDELITY -0.092 10.86230 2.584433 8.00 9
GTB -0.347 0.736439 0.156368 8.00 9
FIRST BANK 0.246 7.206486 2.338393 8.00 9
POLARISE -0.442 2.384979 1.098295 8.00 9
STERLING -0.431 5.704505 3.912315 3.00 9
STANBIC 0.152 8.697229 3.255600 5.00 9
UBA -0.433 12.18952 4.147579 5.00 9
UNION 0.361 2.609414 2.706010 1.00 9
UNITY -0.359 6.381967 1.745875 8.00 9
WEMA 0.236 16.17294 11.58446 8.00 9
ZENITH 0.350 46.26527 52.00436 2.00 9
Augmented Dickey-Fuller results (parametric)
Cross ID AR(1) Variance Lag Max lag Obs
ACCESS -1.134 2.942628 1 -- 8
ECOBANK -1.478 4.521220 1 -- 8
FCMB -1.723 0.832422 1 -- 8
FIDELITY -0.623 7.258792 1 -- 8
GTB -1.168 0.339602 1 -- 8
FIRST BANK -0.476 4.036185 1 -- 8
POLARISE -1.279 1.825780 1 -- 8
STERLING -0.988 4.154314 1 -- 8
STANBIC -0.259 6.423903 1 -- 8
UBA -0.784 5.585504 1 -- 8
UNION 0.323 2.915136 1 -- 8
UNITY -0.827 5.741308 1 -- 8
WEMA -0.186 11.87840 1 -- 8
ZENITH -0.106 25.80506 1 -- 8
Source: Extract from E-view 9.0
The result of the power for all the test procedure when the underlying time series model is
stationary AR, all the procedures produced a reasonably high power over all the sample sizes
and order considered except at order where ADF (Augmented Dickey Fuller) and KPSS
produced extremely low power compared to PP. Under this condition, Philip-Peron (PP) has
the highest power over all the sample sizes and AR orders considered. The table presents
similar analysis on stationary MA, the power of the tests are extremely high over all the
sample sizes and orders considered. All the test procedures produced high power over all the
sample sizes at order 1 but ADF and KPSS produced low power over all the sample size at
order 2 & 3.
Table IV: Presentation of Granger Causality Test
Null Hypothesis: Obs F-Statistic Prob.
AR does not Granger Cause LIQ 112 0.10366 0.9016
LIQ does not Granger Cause AR 0.48732 0.6156
ONR does not Granger Cause LIQ 112 0.14625 0.8641
LIQ does not Granger Cause ONR 1.26128 0.2875
CR does not Granger Cause LIQ 112 0.54224 0.5830
LIQ does not Granger Cause CR 1.47727 0.2329
DI does not Granger Cause LIQ 112 0.43842 0.6462
LIQ does not Granger Cause DI 0.38695 0.6801
ER does not Granger Cause LIQ 112 NA NA
LIQ does not Granger Cause ER NA NA
Source: Extract from E-view 9.0

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The objective of causality test is to examine if past variation in on the variables can affect
significantly the present condition. From table IV above, the probability coefficient of the
variables are greater than 0.05 at 5% level of significance, we therefore conclude there is no
causal relationship between the independent to the dependent and the dependent to the
independent. This means that past variation have no significant effect on the present changes
on the variables.

Discussion of Findings
This study intended to establish the relationship between regulation and the stability of
Nigeria commercial banks. Evidence from the results proved that the independent variables
as estimated in the regression model explained 80 percent variation on the stability of
commercial banks over the periods covered in this study. The beta coefficient of the
variables indicates that capital regulation, activity regulation, ownership regulation and
deposit insurance have positive effect on commercial bank stability. The positive regression
coefficient of 0.223415 as parameter for capital regulation, 0.135859 as parameter for activity
regulation, 0.189510 as parameter for deposit insurance and 0.100944 as parameter for
ownership regulation proved evidence that a unit increase on the variables can increase
commercial banks stability by 2.2 percent, 1.3 percent, 1.8 percent and 1.0 percent. The
positive effect of the variables confirm our a-priori expectation and validates the objectives
of banking sector regulations as contained in relevant laws such as Bank and Other Financial
Institutions Act of 1991 as amended. Findings of the study confirm the findings of Ndugbu
and Ochiabuto (2015) on the positive effect of supervision on the survivability of commercial
banks in Nigeria. However, findings also revealed that entry regulation have negative effect
on commercial banks stability in Nigeria such that a unit increase can negatively affect
commercial banks stability by 4.6 percent. This finding is contrary to the expectations of the
study and the objectives of banking regulation.

Section V: Conclusion and Recommendations

Conclusion
This study aimed to investigate regulation and stability of commercial banks in Nigeria. To
achieve this objective, a cross sectional panel data were sourced from financial statement of
14 commercial banks quoted on the floor of Nigerian Stock exchange from 2009-2018. After
testing the significant of the model, the study adopts the fixed effect model which found that
80 and70 percent variation on liquidity ofcommercial banks can be traced to the independent
variables. It shows that capital regulation, activity regulation, ownership regulation and
deposit insurance have positive effect on stability of Nigeria commercial banks, the T-
Statistics and the probability value justify that ownership regulation and capital regulation
have significant effect on commercial bank liquidity while other variables are statistically not
significant.

Recommendations

1. The regulatory authorities should devise measures, policies and strategies of effective
supervision and ensure that all banking rules and regulations such as capital
regulations are well complied.
2. Further strategies should be formulated to enhance regulation of activities of
commercial banks. Activities that endanger the stability of commercial banks stability
should be discouraged. Section 21 of BOFIA Act should be complied with by the
management of the commercial banks.

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3. Nigeria Deposit Insurance Corporation should ensure that insured commercial banks
comply with the relevant laws guiding corporation. There should also be increase
from the present 1 to 16 ratio of deposit from commercial banks.

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REFERENCES
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