BANK-INHERENT RISKS AND PERFORMANCE IN NIGERIA’S RECESSION ERA: EVALUATING THE EFFICACY OF RISK-BASED SUPERVISION (2012-2019)

Abstract

Nigerian banking sector have been reportedly challenged with deteriorating performance due to problems of lax enforcement of compliance and failure to identify operational vulnerabilities by the apex regulating bodies operating in the sector. To curtail the prevailing challenges, Risk-Based Supervision (RBS) was adopted in order to ensure sufficient oversight and effective risk management practices most especially in a crisis era. This study aimed to evaluate the efficacy of RBS in strengthening the relationship between Bank-inherent risks and performance before and during the period of 2016 recession era in Nigeria. The study applied panel data regression model to estimate the interacting effect of RBS, bank-inherent risks (credit risk, liquidity risk, operational risk, solvency risk, capital adequacy risk, market risk and foreign exchange risk) and banks’ performance (ROA). Secondary data obtained from the annual financial statements of the firms for the periods of 2012-2019 were used in the analysis. The study found insignificant positive interacting effects of RBS and credit risk, liquidity risk, operational risk, and market risks on banks performance during the recession periods in Nigeria. However, negative and insignificant interacting effect of RBS in the relationship between solvency risk and capital adequacy risk on banks’ performance were documented. It was also concluded that RBS has a varied influence in the relationship between firms’ risk and performance of financial service firms in Nigeria in the recession periods. It was recommended the CBN should ensure that the RBS core principle of evaluation of control, management and governance are applied at both business and enterprise-wide levels so as to ensure sound banking operation in any crisis rea.