Economic and Financial Review

Volume 53 Number 2 Article 1

6-1-2015

Effects of monetary policy on the banking system stability in

Nigeria
A. Bamidele
Central Bank of Nigeria

J. Musa
Central Bank of Nigeria

L. Bala-Keffi
Central Bank of Nigeria

O. Owolabi
Central Bank of Nigeria

S. Imam
Central Bank of Nigeria

Follow this and additional works at: https://dc.cbn.gov.ng/efr

Part of the Economics Commons

Recommended Citation
Bamidele, A., Musa, J., Bala-Keffi, L., Owolabi, O., Imam, S. (2005). Effects of monetary policy on the
banking system stability in Nigeria, CBN Economic and Financial Review, 53(2), 1-18.

This Article is brought to you for free and open access by CBN Institutional Repository. It has been accepted for
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 Effect of Monetary Policy on the Banking System
Stability in Nigeria

Bamidele, A., J., Musa, L. Bala-Keffi, O. Owolabi and S. Imam

Abstract
The paper examined the effect of monetary policy on banking system stability in Nigeria.
The main objective was to evaluate how monetary policy affected the banking system
stability during the global financial crisis in Nigeria. Static and dynamic error correction
models were estimated using monthly data from January 2007 to June 2013 and the error
correction model was found most efficient. The banking system stability index was
computed using banking soundness index, banking vulnerability index and economic
climate index. The results showed that increase in monetary policy rate, depreciation of
nominal exchange rate and rising inflation rate negatively affected the banking system
stability. However, similar increase in cash reserve requirement and banking reforms
improved the banking system stability. Accordingly, the paper recommended that the
CBN should be watchful of increase in MPR, depreciation of the Naira and rising inflation to
ensure banking system stability. Also, increase in CRR and financial reforms can positively
impact on the banking system stability in Nigeria. Overall, there is need for the Bank to
identify appropriate adjustment in its instruments to achieve macroeconomic stability and
banking system stability.

Keywords: Monetary Policy, Banking System Stability

JEL Classification Numbers: E52, G15

I. Introduction

T
he aftermath of the global financial crisis led to intense policy and academic
debate on the effects of monetary policy on banking system stability in
developed and developing economies. Even before the crisis, Friedman and
Schwartz (1971) argued that the recession associated with the crash of 1929 and
bank panics of the 1930s should not have resulted in a prolonged depression, if it
had not been fueled by monetary policy mistakes on the part of the Federal
Reserve. The same opinion was expressed by Bernanke (2000). Hartmann,
Straelmans and deVaries (2005) that monetary policy had complications in
assessing banking system stability during crisis periods. Maddalin and Peydro
(2013), however, showed that any banking system that is well capitalised and
highly liquid is more stable and resilient to shocks. In this case, a stable banking
system could be described as one in which any small distortion or shock to the
system will not result into higher destructive impact.


The authors are staff of the Monetary Policy Department, Central Bank of Nigeria.
The views expressed in this paper are those of the authors and do not necessarily
reflect the opinions of the Central Bank of Nigeria.

Central Bank of Nigeria Economic and Financial Review Volume 53 / 2 June 2015 1
2 Central Bank of Nigeria Economic and Financial Review June 2015

The motivation for this paper is to bring out clearly how monetary policy helped
to restore banking system stability in Nigeria following the global financial crisis
(GFC) in 2008/2009. Traditionally, a sound, safe and stable financial system is the
focus of regulatory and supervisory institutions like the Central Bank of Nigeria as
well as monetary policy. It is, therefore, globally recognised that the banking
industry is prone to volatility and fragility arising from exogenous shocks and
endogenous policy measures including monetary policy (Maxwell, 1995).

On the other hand, Stiglitz (2003) and Kashayap and Stein (1994) had
demonstrated that a well-developed, stable and resilient banking system is also
critical to achieve effective financial intermediation and the efficacy of
monetary policy. This is quite true as stable banking system can enhance
monetary policy transmission mechanism thus leading to more potent monetary
policy. According to the definition by the Deutsche Bundesbank in 2003, banking
system stability is “a steady state in which the financial system efficiently performs
its key economic functions such as allocating resources and spreading risk as well
as settling payments”.

To achieve that objective, the paper has been organised into five sections.
Following the introduction, section two provides the literature review including
stylised facts on monetary policy and banking system stability in Nigeria. Section
three focuses on methodology, model specification and data transformation.
Section four examines presentation and discussion of results. Section five contains
summary and policy recommendations.

II. Literature Review

II.1 Stylised Facts on Monetary Policy and Banking System Stability in

Nigeria
II.1.1 Review of Monetary Policy in Nigeria

The statutory mandate of the CBN is derived from the CBN Principal Act of 1958
and its subsequent amendments. Two of the objects at inception were to
promote price stability and a sound financial system. Over the years, the Bank has
used several monetary policy instruments to manage exchange rate, interest
rate, and inflation through the control of money supply. Since inception, the Bank
has implemented two monetary policy strategies; exchange rate targeting (1959-
1973) and monetary targeting regime (1974 to date).

From 1974 to 1992, direct monetary control was used to pursue massive
infrastructural development. Following the financial liberalisation policy, the
Bamidele et. al.: Effect of Monetary Policy on the Banking System Stability in Nigeria 3

approach to monetary management shifted from direct to indirect monetary

control from 1993 to present. This development led to the introduction of Open
Market Operations (OMO) and establishment of five discount houses to facilitate
the market based monetary operations.

Between 1959 and 2001, the monetary policy regimes were on short–term basis
(annual) but the two year medium-term perspective started in 2002. The use of
narrow money (M1) as an intermediate target was replaced with broad money
(M2) in 1992. To strengthen the banking sector, a new monetary policy
implementation framework was introduced (Monetary Policy Rate, MPR with
interest rate corridor) to replace the Minimum Rediscount Rate (MRR) in
December 2006. Overall, the expansionary monetary policy adopted in
September 2008 was reversed in 2010.

Following these developments, the Minimum Rediscount Rate (MRR) and cash
reserve requirement (CRR) which were about 18.0 and 10.0 per cent in 2000,
respectively, were reduced to 9.0 and 4.0 per cent in 2007. However, in response
to liquidity shortages resulting from the global financial crisis, the instruments were
further reduced to 6.0 and 1.0 per cent in 2009. However, with the re-emergence
of inflationary pressures in 2010, both the CRR and MPR were raised to 12.0 per
cent in 2012. The tight monetary policy stance was intended to moderate
inflation and halt speculative demand for foreign exchange.

Figure 1: Relationships among MPR, CRR and Total Credit (1993:01-2013:06)

Figure 1 shows that as MPR and CRR were reduced, DMBs’ total credit increased
and vice versa, which is consistent with the economic theory. However, rising
bank credit may not translate to banking system stability.
4 Central Bank of Nigeria Economic and Financial Review June 2015

II.1.2 Review of Banking System Stability in Nigeria

Banking business in Nigeria started in 1892 following the establishment of the

African Banking Corporation by foreign investors, which was later acquired in
1894 by the Bank for British West Africa. Local investors went into banking business
recording about 185 local banks between 1947 and 1952, but many of them did
not commence operations (Fadare, 2011). Banking sector distress syndrome was
experienced in the 1930s, 1940s and 1950s before the introduction of regulation in
1952 (1952 Banking Ordinance). Banking system became unstable between July
2007 to January 2011, after which it remained in the positive quadrant throughout
the horizon, starting from the zero value. The level of instability was more serious in
2008 and 2009 as shown by figure 2 below apparently due to the impact of the
global financial crisis.

Figure 2: Banking System Stability Index (2007:01 - 2013:06)

Several banking sector reforms had been implemented since the Banking
Ordinance to ensure soundness, safety and stability of the banking system.
Therefore, reform programmes such as increase in the capital base of banks in
1962, 1992, 1998, 2002, 2005 and 2010, liberalisation of interest and foreign
exchange rates (1986/1987) and 2004 bank consolidation and restructuring were
meant to stabilize the banking system. The introduction of a new monetary policy
implementation framework with interest rate corridor in 2006 (MPR replaced MRR)
was aimed at improving the performance of banking sector and monetary policy
transmission mechanism. Other recent reforms include the launching of financial
inclusion strategy in Nigeria on October 23, 2012.

The Nigerian banking system is not insulated from monetary policy shocks, which
became obvious during the global financial crisis. Prior to the crisis, the CBN
Management focused on managing excess liquidity but with the emergence of
Bamidele et. al.: Effect of Monetary Policy on the Banking System Stability in Nigeria 5

the crisis, MPR was reduced from 10.25 per cent to 6.0, CRR reduced from 4.0 to
1.0 per cent, liquidity ratio adjusted downward from 40.0 per cent to 25.0 per
cent, and expanded discount window was introduced to inject liquidity into the
banking system to facilitate the restoration of stability of the banking system.

In the post-crisis period, particularly in 2010, there was a resurgence of inflationary

threat resulting in the re-introduction of tight monetary policy. The Monetary
Policy Committee (MPC) continued to monitor the interbank rates.

Figure 3: Relationships among MPR, CRR and LR -1993:01-2013:06 (per cent)

Liquidity ratio (LR) and capital adequacy ratio (CAR), which stood at about 61.0
and 21.0 per cent in 2000, had declined to 50.0 and 14.0 per cent by end-2004,
respectively. Following the bank consolidation exercise in 2005, LR and CAR
improved to 52.0 and 20.0 per cent. However, with the GFC; LR and CRR declined
to 40.0 and 16.0 per cent in 2008. The indicators gradually improved following the
resolution of the banking sector crisis with the creation of AMCON. By end-2013,
LR and CAR had risen to 68.0 and 19.0 per cent, respectively. The banking system
stability index showed sharp deterioration from April 2007, immediately after
capital market crash of March 2007. It came out of instability in early 2010 but
worsen towards the end of the month. Since July 2011, the banking system
stability index has remained stable although with evidence of fluctuations.
6 Central Bank of Nigeria Economic and Financial Review June 2015

II.2 Related Literature

II.2.1 Theoretical literature

There are theories linking monetary policy with stability of banking system. A few
of them are discussed below:

Liquidity theory for bank operations

The liquidity theory by Diamond and Dybvig (1983) shows that the inability of
banks to meet urgent customer withdrawal needs lead to decline in deposits,
credit and consequently bank runs. In this case, banks that are vulnerable to
bank runs, threaten banking system stability. Therefore, central banks should
always take measures that will enable banks to meet depositors’ withdrawal
requests.

Credit business circle theory

The credit business circle theory originated from the work of Austrian School
economists Ludwig and Hayek (1974). The theory sees business cycles as the
consequence of excessive growth in bank credit resulting from extremely low
market interest rate. The level of interest rates is expected to influence the health
and stability of the banking system. Low interest rates often lead to the creation
of sub-standard assets, which could precipitate banking system crisis. Central
banks are expected to consider the level of interest rate that will not be
detrimental to the health and stability of the banking system.

Cadet (2009) provided the linkage between monetary policy and banking failure
in developing countries. He noted that despite the existence of treasury bills as
alternative source of profit for banks in developing countries, a tightening of
monetary policy increases the probability of bank failure.

The theory of portfolio regulation (Markowitz, 1952) supported by Roger and

Arnold (1978) postulates that portfolio regulation is necessary to maintain safety
and stability of the banking system. This has forced regulatory authorities to insist
on the requirements of minimum liquidity, capital and other prudential ratios.

II.2.2 Empirical literature

A plethora of literature exits on the effect of monetary policy on banking system

stability. Worms (2001) found that banks reduce their credit more easily in
response to a tightening monetary policy measure as their ratio of short term
interbank deposit to total asset declines. Kassim et. al., (2009) using VAR
methodology observed that the balance sheet items of Islamic banks were
Bamidele et. al.: Effect of Monetary Policy on the Banking System Stability in Nigeria 7

relatively more sensitive to monetary policy changes than conventional banks.

This further confirmed that monetary policy can also influence operations of
Islamic banks.

Bernanke and Blinder (1992) using VAR approach and monthly data for the
period 1959:01-1978:12, on federal funds rate, banks’ securities, unemployment,
banks’ deposits, prices and banks’ credits, found that after monetary policy
contraction, deposits decrease almost immediately, while loans do not react
strongly. So banks reduce their securities to change their asset without reducing
their credit after a monetary policy tightening. However, Kashayap and Stein
(1994) using quarterly disaggregated figures showed that different banks reacted
differently to monetary policy shocks. They discovered that loans from small banks
declined after monetary policy contraction, while big banks either increased their
loans or remained unchange as contraction increase interest rates.

Zulverdi et. al., (2006) used an analytical model of bank portfolio behaviour in
Indonesia based on macro-economic theory to understand how banks portfolio
behaviour in maximising profit links to the efficacy of monetary policy. Consistent
with theory, they established that the volume of loans has negative relationship
with the policy rate. They also revealed that increase in capital adequacy ratio
will reduce loan volume as banks will prefer to invest in low risk assets instead of
granting loans.

As a policy prescription to address bank crisis, Mishkin (1996) recommended

expansionary monetary policy and/or lending to banks in industrial countries to
help them recover from financial crisis but added that the approach may be
counterproductive in developing countries in particular, as it could exacerbate
inflation and cause further depreciation of the domestic currency. This was
evident in Nigeria as inflation and sharp depreciation of the naira were
experienced after liquidity injection to cope with impact of global financial crisis.
As an alternative, he further recommended that a strong regulatory and
supervisory system for banks would reduce excess risk behaviours, increase proper
accounting standards and disclosure requirements in developing countries.

Altunbas et. al., (2010) discovered that an unusually low interest rate over a long
time contributed to an increase in banks risk. This situation increases the volume of
loans granted under lower standards and when they are due for repayment, they
turned into high risk assets thereby increasing the quantum of non-performing
loans. Somoye (2006) revealed that interest rate policy would be sufficient to
achieve financial stability and sustainable development. This view was shared by
other authors in both developing and developed economies.
8 Central Bank of Nigeria Economic and Financial Review June 2015

Maddaloni and Peydro (2013) used generalised least squares and GMM panel
regression model to discover that monetary policy rate had impact on bank
stability, bank balance sheet strength and banking prudential policy. They
concluded that monetary and prudential policies are strongly connected and
recommended that monetary policy should pay more attention to financial
stability issues while banking prudential supervision and regulation should focus on
risk taking incentives possibly induced by low short-term interest rate.

III. Methodology

III.1 Theoretical framework

To capture how monetary policy impact on banking system stability, we

computed the banking system stability index, which is based on IMF-FSIs
Compilation Guide of 2006. In particular, the method was developed by Sere-
Ejembi et. al., (2014) as follows:

i. Statistical Normalisation Methods

( X t  Ut )
Zt 
S (1)

Zt is the normalised figure and Xt is the indicator x during the period under study. Ut
and S are mean and standard deviation, respectively. This method was used to
compute banking soundness index involving capital adequacy ratio, liquidity
ratio, profitability and non-performing loan ratio. The banking vulnerability index
(BVI) captures inflation, nominal exchange rate, reserves to total asset ratio, M2 to
reserves ratio and credit to GDP ratio. While the economic climate index (ECI)
incorporates GDP of the major trading partners including United States and
China. Sixty per cent weight was attached to the banking soundness index (BSI),
while banking vulnerability and economic climate indices were assigned 20.0 per
cent weight each. Thus, Banking System Stability Index takes average of
indicators and multiplied them by the weights of each category before adding
up to derive Banking System Stability (BSSI) Index.

ii Empirical Normalisation Method

I it  Min(I t )
It  (
n

Max  I n )  Min(I t )
(2)
Bamidele et. al.: Effect of Monetary Policy on the Banking System Stability in Nigeria 9

The above approach is also known as Conference Board Methodology but the
statistical normalisation method was used to compute the banking system
stability index (BSSI).

4 5 2

BSSI t , ww  Ws   st Z ts  Wv   st Z ts  Wc  ci
Z tc
t 1 t 1 t 1
(3)

Where w r
1 (4)
t  s, v,t

The summation of the weights is one (BSI=0.6, BVI=0.2 and ECI=0.2). Nadya and
Thomas (2011) explained that no literature has provided any convincing
methodology for assigning weight to component for computing banking system
stability index. The weight of individual in each sub-index is normalised as:

ui
i 
 UU i
(5)
i 1

III.2 Relevant Variables

Banking System Stability Index (BSSI) is averaged aggregate weighted index of

banking soundness indicators (liquidity ratio, capital adequacy ratio, NPL ratio
and profitability ratio), banking vulnerability indicators (inflation, M2/Reserves,
Reserves/Total Asset, Exchange rate, Total asset to GDP ratio) and Economic
climate index (US Real GDP and China Real GDP). Monetary Policy Rate (MPR) is
the policy rate of the CBN. Cash Reserve Requirement (CRR) is the per cent of
total deposits of banks that should be kept with the CBN. Nominal Exchange Rate
(EXCH) refers to the price of a unit of US dollar expressed in the domestic currency
(naira). Inflation Rate (Inf) refers to headline inflation rate. Financial reforms
dummy (D65) represents 1(one) for existence of reforms and 0 (zero) for any
period without reforms.

III.3 Empirical Model

Ajayi (1978) emphasised that the choice of monetary policy instruments should
depend on the nature of a particular economy. However, Schwartz (1969)
posited three criteria used for choice of short-term target of monetary policy to
be, whether it is measurable, and can be controlled by central bank and
whether it can be used as an indicator of monetary condition. In another option,
10 Central Bank of Nigeria Economic and Financial Review June 2015

Crockett (1973) showed two techniques of central bank implementing monetary

policy to include market intervention and portfolio constraints. Central banks
influence the availability and rate of returns on assets in the financial market and
also restrict group of institutions (banks) from acquiring assets and liabilities; this
relates to prescribed minimum and maximum prudential ratios.

Predicated on the prepositions of our theoretical framework and empirical

review, the model specification is as follows:
BSSI t , www   1   2 mpr   3 exh   4 crr   5 inf   6 d 65  ui
(6)

After the estimation of static model, variables are found to be stationary at first
difference 1(1) and cointegrated, which allowed estimation of the dynamic error
correction model. This model helps to identify how long it would take for any
banking system instability to restore to equilibrium position (stability). The lag
structure of the model was also investigated, utilising the lag-length criteria and
found to be one (1) following the Schwartz criteria. The estimable dynamic error
correction model is:

BSSI t , ww   1   2 mpr (1)  3exh(1)   4crr (1)  5 inf(1)   6 d 65  ecm(1)  ui

(7)

III.4 Estimation Technique

The ordinary least squares method was represented as:

Yi   0  i X i  ui
(8)

Where yi is the dependent variable and X i is the vector of independent variables

with corresponding parameters (  ) including intercept and random term ( ui )
which recognises the unknown variations. Both static and dynamic error
correction methodologies were used: Having established that the variables were
stationary at 1(1) and ECM was stationary at level 1(0), dynamic error correction
methodology was adopted.

Rafiq and Malick (2008) explained that the standard Mundell-Fleming-Dornbush

model revealed that when interest rate is reduced as an expansionary monetary
policy, it leads to increase in prices and reduces real exchange rate as well as
increases money supply and the output level. We used multiple regression models
specifically static and error correction models to evaluate the effect of monetary
policy actions on banking system stability.
Bamidele et. al.: Effect of Monetary Policy on the Banking System Stability in Nigeria 11

III.5 Data Sources and Transformation

The need to evaluate the effect of monetary policy actions on banking system
stability necessitates the use of high frequency data so as to capture short-term
variation. The computed banking system stability index is used as the dependent
variable, while monetary policy rate, cash reserve requirement, nominal
exchange rate of the naira, inflation rate and financial reform as dummy
represent the independent variables. The data were sourced from the CBN
Annual reports, Banking Supervision Department Annual reports, NBS Official
Website, e-FASS and CBN Official Website. The data were transformed by
differencing and lagging to contain problems of autocorrelation and
heteroscedasticity. The banking data represent the banking industry specific
figures including macro variables such as inflation rate and nominal exchange
rate.

IV. Presentation and Discussion of Results

The unit root test result in Table 1, using Augmented Dickey-Fuller test showed that
the variables are integrated of order one 1(1). The ECM is stationary at level, 1(0)
which is consistent with the theory.

Table 1: Unit Root Test

Variable ADF Test Result
Level (5 per cent) First Difference (5 per Order of
cent) Integration
Test Critical P- Test Critica P-
Statisti Value Value Statistic l Value Value
c
BSSI -2.4843 -2.9029 0.1235 7.8345 -2.9012 0.000 1(1)
CRR 0.1386 -2.8996 0.9667 8.4428 -2.9001 0.000 1(1)
MPR -0.7065 -2.8996 0.8384 8.1123 -2.9001 0.000 1(1)
EXCH -1.2090 -2.9001 0.6668 5.8162 -2.9001 0.000 1(1)
INF -1.6370 -2.8996 9.4590 8.8900 -2.9001 0.000 1(1)
ECM -3.0875 -2.8996 0.0317 1(0)

Cointegration Test

The results of the Johansen trace and maximum eigen value tests, with a linear
deterministic trend indicated that each of the test has one co-integrating
equation at the 5.0 per cent level of significance. This condition is necessary for
12 Central Bank of Nigeria Economic and Financial Review June 2015

the estimation of error correction model. The static model results indicated that
only nominal exchange rate, CRR and financial reforms influenced banking
system stability. Inflation and MPR were not significant. In addition, the
explanatory power (Adj. R2) of 48.0 per cent was low with presence of serial
correlation. The residual was tested for unit root and was found stationary at level,
at 5.0 per cent level of significance.

Table 2: Estimation Results

Static Model Dynamic Error Correction Model
Variable Coefficient P-Value Variable Coefficient P-Value

C 1.6753 0.0093 C 1.4861 0.0001

MPR -00428 0.1239 MPR(-1) -0.0606 0.0003

CRR 0.0989 0.0000 EXCH(-1) -0.0088 0.0009

EXCH -0.0136 0.0018 CRR(-1) 0.0976 0.0000

INF 0.0047 0.7475 INF(-1) -0.0180 0.0493

D65 0.2843 0.0008 D65 0.1876 0.0004
ECM(-1) -0.8341 0.0000
Adj. R2 48.86 Adj.R2 81.58
Prob(F- 0.0000 Prob(F- 0.0000
Stat) Stat)
AIC 0.44 AIC -0.6138
DW 0.45 DW 2.07

The dynamic error correction model results in table 2 above indicated that rising
MPR was likely to reduce banking system stability, indicating that, tight monetary
policy may negatively affect banking system stability. On the contrary, increase in
CRR was expected to increase banking system stability probably because banks
will be able to build buffer and pay special attention to risks and portfolio
management. The result also showed that increase in inflation and depreciation
of the naira may make banks to become less stable. The one period lagged ECM
is with negative sign and significant at 1.0 per cent. The ecm (-1) of -0.8342, shows
that the banking system corrects its previous period instability at a speed of 83.4
per cent monthly. Thus, Nigerian banking system returns to steady state at a very
high speed, which enables the Nigerian banking system to remain resilient.

In order to confirm the reliability and appropriateness of the estimated error

correction model, various diagnostic tests were conducted including normality,
serial correlation LM and Heteroscedasticity tests. Others included recursive
residual and CUSUM of squares tests. The Jarque-Bera test statistic confirm
Bamidele et. al.: Effect of Monetary Policy on the Banking System Stability in Nigeria 13

acceptance of hypothesis of normality (Table 5). Also, the result of Breusch-

Godfrey serial correlation test and Heteroscedasticity test indicate that the model
has no serial correlation and is homoscedastic. The recursive residual test showed
no evidence of serial correction as the distribution was within the plus/minus 2
standard deviation but between 2007 and 2009, it was outside the bound
indicating instability which corresponds to the period of the global financial crisis
of 2008/2009. Similar situation was evidenced in the graph of the banking system
stability index discussed under the stylised facts (Fig. 2).

Finally, the structural stability test using CUSUM of squares test revealed that the
model was well specified and stable because the CUSUM lies within the 5.0 per
cent significance bound.

V. Recommendation and Conclusion

The findings revealed that raising MPR by the CBN was likely to make banking
system less stable. This required the Bank to know how far MPR could go to avoid
the anticipated negative impact on the banking system stability. Similarly,
increase in inflation rate and depreciation of the naira were expected to
negatively affect banking system stability. On the positive side, financial reforms
and increase in CRR were likely to make the banking system more stable.

In line with the results of the model, we recommend that the CBN:

I. Should continue to use CRR, MPR and exchange rate to ensure effective
monetary management and stable banking system in Nigeria. However,
there should be serious caution on how far tight monetary policy can go
and by how much the naira should be allowed to depreciate to avoid
fueling banking system instability as revealed by the paper.
II. CRR can continue to be used as macro-prudential instrument to ensure
banking system stability.
III. Should endeavour to achieve its inflation objective as this would improve
the banking system stability.
IV. Should sustain financial reforms of the banking system in order to
engender stability. Overall, should try to balance the objective of
macroeconomic stability with the objective of banking system stability to
achieve sustainable economic growth in Nigeria.
14 Central Bank of Nigeria Economic and Financial Review June 2015

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16 Central Bank of Nigeria Economic and Financial Review June 2015

Appendices

Table 3: Summary Statistics

BSSI CRR MPR EXCH INF D65
Mean 0.0016 4.3462 9.1378 143.6294 10.9 0.6667
Median 0.1342 3 9.5 150.2218 11.7 1
Maximum 0.5505 12 12 158.3868 15.6 1

Minimum -1.0768 1 6 117.7243 4.1 0

Std. Dev. 0.3947 3.9074 2.240654 14.9328 3.0325 0.4745
Skewness -1.3065 1.0404 -0.09869 -0.7876 -0.7284 -0.70711
Kurtosis 3.7428 2.6040 1.6600 1.9281 2.6773 1.5
Jarque-Bera 23.98507 14.5825 5.9624 11.7984 7.2366 13.8125
Probability 0.0000 0.0007 0.0507 0.0027 0.0268 0.0010
Sum 0.1216 339 712.75 11203.1 850.2 52
Sum Sq. Dev. 11.9956 1175.654 386.5809 17170.29 708.12 17.33333
Observations 78 78 78 78 78 78

Table 4 : Cointegration Test

Unrestricted Cointegration Rank Test (Trace)

Hypothesised Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.462530 123.6453 117.7082 0.0199

At most 1 0.259964 77.07915 88.80380 0.2590
At most 2 0.224375 54.49993 63.87610 0.2381
At most 3 0.188176 35.44343 42.91525 0.2273
At most 4 0.154177 19.80801 25.87211 0.2358
At most 5 0.092137 7.249640 12.51798 0.3192

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesised Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.462530 46.56613 44.49720 0.0293

At most 1 0.259964 22.57922 38.33101 0.8284
At most 2 0.224375 19.05650 32.11832 0.7251
At most 3 0.188176 15.63542 25.82321 0.5773
At most 4 0.154177 12.55837 19.38704 0.3650
At most 5 0.092137 7.249640 12.51798 0.3192

Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Bamidele et. al.: Effect of Monetary Policy on the Banking System Stability in Nigeria 17

Table 5: Result of Normality Test

10
Series: Residuals
Sample 2007M02 2013M06
8 Observations 77

Mean 1.33e-16
6 Median 0.009835
Maximum 0.310381
Minimum -0.362148
4 Std. Dev. 0.163612
Skewness -0.077284
Kurtosis 2.417924
2
Jarque-Bera 1.163677
Probability 0.558870
0
-0.3 -0.2 -0.1 0.0 0.1 0.2 0.3

Table 6: Breusch-Godfrey Serial Correlation LM Test:

F-statistic 2.358275 Prob. F(2,68) 0.1023

Obs*R-squared 4.994385 Prob. Chi-Square(2) 0.0823

Table 7: Heteroskedasticity Test: ARCH

F-statistic 1.213910 Prob. F(1,74) 0.2741

Obs*R-squared 1.226597 Prob. Chi-Square(1) 0.2681
18 Central Bank of Nigeria Economic and Financial Review June 2015

Fig. 4: CUSUM of Squares Fig. 5: Recursive Residual

.4
1.4

.3
1.2

.2
1.0

0.8 .1

0.6 .0

0.4 -.1

0.2 -.2

0.0 -.3

-0.2 -.4
II III IV I II III IV I II III IV I II III IV I II III IV I II II III IV I II III IV I II III IV I II III IV I II III IV I II
2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013

CUSUM of Squares 5% Significance Recursive Residuals ± 2 S.E.