IMPACT OF TIER 1 CAPITAL RATIO AND LEVERAGE RATIO ON FINANCIAL SYSTEM STABILITY IN NIGERIA AFTER THE GLOBAL FINANCIAL CRISIS

Abstract

This paper investigates the impact of Tier 1 capital ratio and leverage ratio on financial system stability in Nigeria, focusing on the period following the global financial crisis. Using a regression discontinuity design (RDD), the paper analyzes panel data from 14 banks in Nigeria spanning 2010 to 2021. This methodology ensures that the observed effects are attributable to changes in Tier 1 capital and leverage ratios rather than external confounding factors. The paper aims to evaluate whether compliance with capital adequacy and leverage requirements, as key regulatory metrics, enhances the resilience and stability of the banking sector. The findings reveal a significant positive relationship between Tier 1 capital ratio and financial system stability, indicating that higher levels of core capital enable banks to absorb losses and mitigate systemic risks effectively. Similarly, the leverage ratio demonstrates a substantial positive impact, emphasizing the importance of limiting excessive risk-taking by maintaining a prudent balance between equity and debt financing. These results align with the post-crisis regulatory emphasis on capital and leverage requirements, as exemplified in the Basel III framework. The study underscores the importance of capital adequacy and leverage management as critical tools for financial system stability. The findings validate the efficacy of regulatory reforms in Nigeria and provide evidence for their continued implementation and enhancement. It offers valuable insights for policymakers and regulators, recommending the enforcement of higher Tier 1 capital requirements, stricter leverage ratio monitoring, and periodic stress testing tailored to the unique characteristics of the Nigerian economy. The findings contribute to the growing body of literature on financial stability in emerging markets, highlighting the importance of tailored regulatory frameworks in fostering a robust and resilient banking sector.