Supervision and Survival of Banks: Evidence from the Nigerian Banking Industry

Abstract

The paper establishes a relationship between supervisionand survivability of banks. The study employs EVIEW statistical software using the two stage least square method to evaluate a set of factors which affect bank survivability. Data for the study were extracted from the Central Bank of Nigeria’s (CBN) statistical bulletin and bureau of statistics publications (1981 – 2013). The results confirm positive significant relationship amongcapital protection, earnings strength and bank liquidity while cash reserve ratio and bank strength had negative impact on bank liquidity. These variables were found to be inelastic due to time lag banks may take to adjust to supervision patterns, reforms and finding alternatives. A short time frame given by the supervisory authority to implement a new regulation by banks resulted to inelastic bank liquidity. The strength-supervision model showed positive significant relationship among bank liquidity, asset quality and bank strength. The supervisory authority as a watch dog cannot be an umpire and a player,but rather would prefer giving a fitting burial to banks that have failedrather than jeopardize the whole system. It is therefore worthwhile to devote considerable resources to the establishment of effective supervision and inspection.

Keywords:  Bank supervision, Bank liquidity, Bank strength, cash reserve ratio, earnings strength.