Stress Testing in the Nigerian Banking Sector

16 Pages Posted: 11 Sep 2016

See all articles by Adesoji Farayibi

Adesoji Farayibi

Centre for Allied Research and Economic Development (CARED); University of Ibadan, Ibadan, Nigeria

Date Written: September 9, 2016

Abstract

This paper examined stress testing in the Nigerian banking sector from 2004-2014 using error correction mechanism (ECM) and Ordinary Least Square (OLS) methodologies. The study adopted the bottom-up approach to stress management. Evidence from the analysis showed that stress testing is important to building a strong and viable financial system in the country. Bank’s going concern depends on profitability, solvency and liquidity whereas banks performance index depends on the behaviours of macroeconomic variables. The study found that Nigerian banking system is susceptible to various risks both within and outside the country. They are also exposed to macroeconomic risks as their performance index is based on these variables. The study concluded that how banks respond to risks determines the going concern and the viability of the nation’s financial system. Thus, a thorough credit risk management framework championed by the major stakeholders involved in the credit disbursement was recommended.

Keywords: Stress Testing, Banking Sector, Credit Risk, Bottom-up Approach, Performance Index

Suggested Citation

Farayibi, Adesoji, Stress Testing in the Nigerian Banking Sector (September 9, 2016). Available at SSRN: https://ssrn.com/abstract=2836967 or http://dx.doi.org/10.2139/ssrn.2836967

Adesoji Farayibi (Contact Author)

Centre for Allied Research and Economic Development (CARED) ( email )

Ibadan, Oyo State
Nigeria

University of Ibadan, Ibadan, Nigeria ( email )

Ibadan, Nigeria
Ibadan, Nigeria
Ibadan
Nigeria

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