Capital Ratios As Predictors of Distress: A Case Study of the Nigerian Banking System

§ Ogun State University, Ago-Iwoye, Ogun State Nigeria

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Abstract

We examine the relationship between capital ratios and bank distress, and also compare the efficiency of three capital ratios -risk-weighted, leverage and gross revenue ratios, in the prediction of bank distress. The above objective is based on the recent global failure of banks which is a pointer to the fact that the Early Warning Systems (EWS) Models, with the aim of identifying weaknesses and vulnerabilities among financial institutions have either failed or have been wrongly applied. In addition, some studies show that the risk-weighted capital ratio used in bank distress prediction may become obsolete and ineffective within a short time and that it may give rise to economic problems. Some other studies also show that capital ratios may in fact not be related to bank distress and should not be used to monitor it. Data on bank distress in Nigeria from 1991 to 2004 are used and the OLS regression, autoregression and the Granger causality test are used to analyse the data.The study show that the three capital ratios predicted bank distress significantly and that there is no significant difference in the level of efficiency of the three capital ratios in distress prediction. The continued use of capital ratios in the prediction of bank distress is suggested. The leverage capital ratio and the gross revenue capital ratio may be used to replace the risk-weighted capital ratio, since they are simpler and may not be influenced by the ever changing risk pattern of the banks.

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Funding

No external funding was declared for this work.

Conflict of Interest

The authors declare no conflict of interest.

Ethical Approval

No ethics committee approval was required for this article type.

Data Availability

Not applicable for this article.

How to Cite This Article

Dr. Amachukwu C. Okezie, Dr. Richard O. Akingunola, Prof. Sheriffadeen A. Tella. 1970. "Capital Ratios As Predictors of Distress: A Case Study of the Nigerian Banking System". Global Journal of Human-Social Science - C: Sociology & Culture GJHSS-C Volume 11 (GJHSS Volume 11 Issue C3).

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Crossref Journal DOI 10.17406/GJHSS

Print ISSN 0975-587X

e-ISSN 2249-460X

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GJHSS-C Classification FOR Code: 150299
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English
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Capital Ratios As Predictors of Distress: A Case Study of the Nigerian Banking System

Dr. Okezie
Dr. Okezie Ogun State University, Ago-Iwoye, Ogun State Nigeria
Dr. Akingunola
Dr. Akingunola <p>Ogun State University, Ago-Iwoye, Ogun State Nigeria</p>
Prof. Tella
Prof. Tella <p>Ogun State University, Ago-Iwoye, Ogun State Nigeria</p>