Effect of Capital Adequacy Ratio and Liquidity Ratio on Financial Stability of Quoted Deposit Money Banks In Nigeria

Abstract

The financial stability of deposit money banks has remained a focal point of regulatory and academic discourse, given their critical role in supporting global financial systems and economic growth, as these institutions serves as the primary conduits for mobilizing savings and providing credits. This study examined the effect of capital adequacy ratio and liquidity ratio on stability of quoted deposit money banks in Nigeria. An ex post facto research design and a longitudinal panel approach was utilized. Census sampling was used to select 13 quoted banking institutions with consistent financial reports for the period 2015–2024, resulting in 130 bank-year observations. Secondary data were obtained from the banks’ audited annual reports, Nigerian Exchange Group filings and relevant regulatory publications. Bank stability was measured using the Z-score. The data were analysed using panel regression analysis. The Hausman specification test supported the fixed-effects model. The findings revealed that capital adequacy ratio and liquidity ratio had positive and significant effects on bank stability. The study concluded that capital strength and adequate liquidity are essential to the stability of quoted DMBs in Nigeria. It recommended stricter risk-sensitive capital and liquidity supervision.