Effects of credit and liquidity risks on the financial stability of listed commercial banks in Nigeria

Abstract

This study empirically examines the effects of credit and liquidity risks on the financial stability of listed commercial banks in Nigeria over the period 2005–2024. Using a balanced panel dataset of 13 banks (260 firm-year observations) derived from audited annual reports, financial stability is proxied by the Capital Adequacy Ratio (CAR) and Leverage Ratio (LR), while credit and liquidity risks are measured by the Non-Performing Loans ratio (NPL) and Liquidity Coverage Ratio (LCR), respectively. Bank size is included as a control variable. The study employs panel econometric techniques, including pooled Ordinary Least Squares, Fixed Effects (FE), and Random Effects (RE) models, with the Hausman test indicating the superiority of the FE specification. The results of tse study are significant. The Fixed Effects model (as preferred under the Hausman test, χ² = 16.92, p < 0.01 for CAR; χ² = 13.58, p < 0.01 for LR), shows that credit risk (NPL) is significantly and inversely related to both measures of financial stability. In contrast, liquidity risk (LCR) significantly and positively affected financial stability with coefficients 0.031 (p < 0.05) and 0.017 (p < 0.05) for the CAR and LR, respectively. These models account for 64.8% and 61.2% of the within-bank variation in CAR and LR, respectively. Overall, the study highlights the critical interplay between credit and liquidity risk management in sustaining banking sector stability. It provides empirical evidence supporting the need for strengthened regulatory oversight on asset quality and liquidity positions. The findings offer important policy implications for regulators and bank managers in emerging economies, particularly in designing integrated risk management frameworks to mitigate systemic vulnerabilities and enhance financial resilience.