Firm Level Factors, Market Power, Interest Rate and Financial Stability of Commercial Banks in Nigeria

Abstract

The study sought to examine the effect of firm level factors on financial stability of commercial banks in Nigeria. The specific objectives were to determine the effect of capital adequacy, bank size, management efficiency and earnings ability on financial stability of commercial banks in Nigeria. Additionally, the study analyzed the mediating and moderating effects of market power and interest rate respectively on the relationship between firm level factors and financial stability of commercial banks in Nigeria. The propositions of buffer capital theory, market power theory, efficiency structure theory, liquidity theory of interest rates and financial intermediation theory were used in underpinning the relationship between the study variables. Positivism doctrine and causal research design were adopted. Panel data was used covering the period 2010 to 2017. Panel regression analysis was applied and it was established that from the selected firm level factors, only bank size and earnings ability had significant effect on financial stability of commercial banks in Nigeria. Hence, capital adequacy and management efficiency had insignificant effect on financial stability of commercial banks in Nigeria. Market power had no significant mediation effect on the relationship between firm level factors and financial stability of commercial banks in Nigeria. Interest rate had significant moderation effect on the relationship between firm level factors and financial stability of commercial banks in Nigeria. The study recommended that growing bank sizes should be supported by a more robust operational system devoid of bureaucracies and complexities. It was further recommended that earnings generated by banks should be sustained through prudent investments. The study recommends that in view of the prediction powers of interest rate, it should be set with caution in view of market and industry analyses so as to ensure congruency with macro-prudential policies. The study suggests that additional studies can further examine the effect of capital adequacy and management efficiency on financial stability of commercial banks in Nigeria in view of the insignificant effect established for these variables, which can be carried out using different methodology.