Bank Loan Loss Cyclicality in Nigeria

Abstract

The occurrence of global and local meltdowns and the subsequent instability experienced by the Nigerian banking sector necessitate empirical test of the nexus between business cycle and loan loss provisions (LLPs). This study examined the loan loss cyclicality behavior of Nigerian deposit money banks (DMBs) taking into consideration economic-boom-bust-cycles. Bank-level and macroeconomic data were obtained from sampled 16 DMBs’ annual reports and CBN Statistical Bulletin respectively between 2007 and 2017 covering both periods of global financial meltdown (2008-2009) and local economic recession (2016-2017). The study’s hypotheses were tested using Prais Winsten regression with correlated Panel Corrected Standard Errors (PW-PCSE). The results generally showed that provisioning behavior by Nigerian DMBs is pro-cyclical. This was based on significantly negative coefficients of loans growth (ΔLOAN) and real GDP growth rate (GDPGR) representing bank-specific and macroeconomic loan loss pro-cyclicality respectively. In contrast, loan loss counter-cyclicality was found during global financial crisis against majority evidence in the literature. Meanwhile, loan loss pro-cyclicality was peculiar to Nigerian DMBs during local economic recession. While the loan loss pro-cyclical behaviour of Nigerian DMBs represents imprudent provisioning policies and might have been incidental to the collapse of some Nigerian banks in the past, the counter-cyclicality during global meltdown is traceable to the fact that the crisis had no substantial negative influence on Nigeria’s financial system. To address the problem of pro-cyclicality, it was recommended that bank regulators ensure that macroeconomic prediction models adopted by Nigerian DMBs be made relative perfect. There is also need for strengthening bank capital buffers in record time and conduct of stress tests for individual DMBs rather extant consolidated approach among others.