Banking Sector Liquidity and Financial Crisis in Nigeria

Abstract

Employing a linear least square model and time series data from 1980 to 2009, this paper studies the determinants of Banking Sector liquidity in Nigeria and assesses the extent to which the recent financial crises affected liquidity in deposit money banks in the country. The paper makes some interesting findings. First, we find that only liquidity ratio, monetary policy rate and lagged loan-to-deposit ratio are significant for predicting Banking Sector liquidity. Secondly, we find that a decrease in monetary policy rates, liquidity ratios, volatility of output in relation to trend output, and the demand for cash, leads to an increase in current loan-to-deposit ratios; while a decrease in currency in circulation in proportion to Banking Sector deposits; and lagged loan-to-deposit ratios leads to a decline in current loan-to-deposit ratios.

Our result suggests that during periods of economic or financial crises, deposit money banks are significantly illiquid relative to benchmarks, and getting liquidity monetary policies right during these periods is crucial in ensuring the survival of the Banking Sector.