MACROECONOMIC VOLATILITY AND BANK SOUNDNESS IN NIGERIA
Keywords:
Bank Stability, Exchange Rates, Inflation,, Monetary Policy Rates, ARDL ModelAbstract
This study used annual time series data from 1994 to 2024 to investigate the effect of macroeconomic variables on bank soundness in Nigeria. The Z-score (LNZSCORE) served as a proxy for bank soundness, and economic growth (LNGDP), inflation (LNINF), exchange rate (LNEXR), and monetary policy rate (LNMPR) were the explanatory factors. The Autoregressive Distributed Lag (ARDL) method was used in the study to evaluate the relationship's long-term and short-term dynamics. A long-run equilibrium link between the variables was identified by the ARDL results. With a coefficient of 3.7416 (p < 0.01), economic growth had a long-term positive and statistically significant impact on bank soundness. This suggests that consistent increases in economic activity improve the stability of the banking sector by boosting bank profitability and borrowers' ability to repay loans.The long-term statistical insignificance of inflation, exchange rates, and monetary policy rates, however, indicates that their long-term impacts on bank soundness were limited during the study period. The short-run error correction model further demonstrated that while exchange rate variations have a delayed beneficial impact on bank stability, economic growth has a major impact on bank soundness across many lags. The results indicate that while macroeconomic shocks like exchange rate changes may primarily impact bank stability in the short term, steady economic growth is crucial to bolstering the resilience of the banking system.In order to improve the stability of Nigeria's banking system, the report suggests policies that support steady economic growth, careful monetary management, and efficient financial sector regulation..
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