Bank Capitalization and Economic Crisis: What Lessons can Nigeria Learn?

Abstract

This study examines the adequacy of bank capitalization in Nigeria. This, is hoped will lead to an insight into the sector so as to provide appropriate guidance for the system. The banks in Europe and U.S are currently going through some forms of financial turbulence, and so many of them have had their credit ratings downgraded by rating institutions. Central to their problems is capital inadequacy. These banking  crises are negatively impacting the economies and could more seriously impact  economies like Nigeria’s  because we do not have as strong institutions as do these more organized economies. The study uses secondary data to analyze capital adequacy in Nigerian banks. The results of the study show that the covering of depositors in the banks by equity capital is grossly inadequate suggesting that in the event of a major banking crisis, the banks will not be able to survive, which is ominous for the overall economy. It is therefore recommended that: the capitalization standards be raised for the banks; that capitalization be made a function of levels of activities; and that regulators should insist on higher standards of corporate governance in the banks particularly those principles touching on transparency and accountability.

Key words: bank capitalization, liquidity, credit crisis, economic crisis, risk management