Financial Stability, Prudential Regulation, and Bank Performance: Panel Evidence from Nigeria

Abstract

Purpose

This study examines the effect of bank-specific financial soundness indicators on the performance of listed Deposit Money Banks (DMBs) in Nigeria. It investigates whether prudential regulation moderates the relationship between financial soundness and bank performance.

Methodology
The study employs panel data from ten publicly listed Nigerian DMBs during 2014–2023. Financial performance is proxied by return on equity (ROE), while financial soundness indicators include capital adequacy, liquidity management, asset quality, and management efficiency. Prudential pressure is incorporated as a moderating variable. A Generalized Least Squares random effects estimator is applied to account for unobserved bank-specific heterogeneity and potential data issues.

Findings
The results reveal that capital adequacy, liquidity management, and prudential pressure exert a positive and significant effect on bank profitability, while asset quality negatively affects ROE. Management efficiency shows no significant direct impact on performance. Furthermore, prudential regulation significantly moderates the relationship between financial soundness indicators and bank performance, strengthening the positive effects of capital adequacy and liquidity while amplifying the adverse impact of poor asset quality.

Conclusion
The study concludes that financial soundness indicators are critical determinants of bank performance in Nigeria, and that prudential regulation plays a vital moderating role in enhancing profitability. These findings underscore the importance of strong but balanced regulatory frameworks that reinforce capital and liquidity buffers, promote effective credit risk management, and allow sufficient flexibility to support sustainable bank performance in emerging markets.