This study aims to investigate the determinants of financial stability in Nigeria.
The two-stage least squares regression and fully modified ordinary least squares regression methods were used to estimate the determinants of financial stability in Nigeria from 2002 to 2021.
Banking sector return on assets (ROA), regulatory capital ratio, the level of financial inclusion, economic growth, inflation and the total unemployment rate are significant determinants of financial stability in Nigeria. ROA and the rate of unemployment have a significant positive impact on financial stability. The regulatory capital ratio, the level of financial inclusion, economic growth and inflation have a significant negative impact on financial stability in Nigeria.
High bank profitability (or high ROA), low regulatory capital ratio and low inflation are crucial for financial stability in Nigeria. The results suggest that policymakers in Nigeria should use a mix of macroprudential and macroeconomic policy tools to ensure that banks remain profitable, maintain a minimum regulatory capital ratio and operate in a low inflation and low unemployment environment in order to preserve financial stability in Nigeria.
Empirical research on the macroeconomic determinants of financial stability in Nigeria is scarce in the literature. This study adds to the literature by examining the bank-specific and macroeconomic determinants of financial stability in Nigeria.
