– Basel II and Financial Performance of Deposit Money Banks in Nigeria –
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ABSTRACT
The main thrust of Basel II framework is to ensure that banks maintain adequate liquidity and higher capital buffers that will match their operations in the course of financial intermediation.
In spite of this thrust, unanimity does not exist among bankers, financial regulators, scholars and researchers on the ability of Basel II to prevent future banking crisis and the effects it may have on the profitability of banks.
While the protagonists lauded it to be a remarkable financial reform, the critics rebutted it to be a formidable regulatory reform that will affect the financial performance of banks adversely.
In view of this divergence, this study examined the impact of Basel II on financial performance of deposit money banks (DMBs) in Nigeria.
Secondary data were collected over a period of 5 years from the annual reports and accounts of 8 sampled DMBs. A correlational research design was adopted while a parametric analytic technique of the OLS multiple regressions with panel data methodology was used to analyze the data.
The results of the study, using STATA 10 as a statistical tool, revealed that capital adequacy ratio (CAR) strongly and negatively influences returns on assets (ROA) of the DMBs under study at 5% level of significance with a t-value of -2.32.
INTRODUCTION
1.1 Background to the Study
The need to strengthen regulatory standards of banks against systemic crisis, which negatively affects the investors‟ confidence and financial system at large by the supervisory and financial regulatory authorities,
has been reinforced by the Basel Committee on Banking Supervision (BCBS) through its release of a new regulatory capital standard called Basel II in 2004.
Basel II is the second Capital Accord of the BCBS, which requires higher capital buffer for banks to accommodate credit as well as operational and market risks in the business of financial intermediation.
Its objectives among others include eliminating regulatory arbitrage by getting risk weights right and align regulation with best practices in risk management.
It provides banks with incentives to enhance risk measurement and management capabilities and seeks to align regulatory capital of banks with economic risk.
It sets regulatory benchmark of capital for three categories of risks, which are credit, operational and market risks; and unlike its predecessor called Basel I, the capital charges of the Basel II standard are based on asset quality rather than on asset type.
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