Bank Consolidation and Bank Risk Taking Behaviour: A Panel Study of Commercial Banks in Nigeria

Abstract

This paper investigates the impact of bank recapitalization on the risk taking attitude of commercial banks in Nigeria. We employed panel data model in the analyses and the results show that increase in bank capital promotes bank stability. The results also reveal that excessive provisions for bad loans may be an indication that a large part of bank credit is nonperforming and this affects bank’s stability adversely. The results further indicate that growth in size is an important determinant of credit risk alongside large capital, although growth in size of banks has a nonlinear effect on bank stability. We found that the consolidation period was followed by abnormal increases in bank lending, indicating the existence of moral hazard problem. Our findings suggest that increase in capital base should also be matched with effective regulations to prevent moral hazard problem from dampening the positive effect of capital reforms on bank stability.

Keywords: recapitalisation, merger, consolidation, reforms, risk-taking

JEL Classification: G11, G21