CHAPTER ONE

INTRODUCTION
1.1 Background of the Study
The banking sector plays a significant role in enhancing and developing a nation’s economy. Banks provide a safe
link between the savers who deposit their money and the investors. In addition, banks are involved in current and future
development plans of an economy by providing capital for innovation, and infrastructure, and create job opportunities. It
is therefore, necessary evaluate the financial performance of banks in order to identify their strengths and also possible
weaknesses in their managerial skills and competencies which can be strengthened to enhance the services of they
provide. In addition, banks must make future plans to develop their service standards to facilitate balanced economic and
technological growth in the country (Fotios, Chrysovalantis & Constantin, 2006).
Efficiency in financial performance of banks is very important in all societies and economic systems. One of the
most important challenges faced by bank managers, therefore, is how to optimally use their scarce financial resources. In-
depth analysis and evaluation of the financial performance of different banks can identify the strengths and weaknesses in
the system further improvement. In other words, analysis of financial performance provides an insight into how efficient a
bank is in using its assets to generate profits and how sound was its financial health was over a given period of time. It can
also, be used to compare and assess similar firms across the domain of banking in the country ( Georgios, Chortareas &
Alexia, 2009).
Banks are a vital parts of a nation’s economy. In their traditional role as financial intermediaries, banks ensure the
transmission of funds from surplus to deficit units and serve to meet the demand of those who need funding. Banks
facilitate spending and investment, which fuel growth in the economy. However, despite their important role in the
economy, banks are nevertheless susceptible to failure. Banks, like any other business, can go bankrupt.
However, unlike most other businesses, the failure of banks, especially very large ones, can have far-reaching
implications. As we saw during the great depression and most recently, during the global financial crisis and the ensuing
recession, the health of the bank system (or lack thereof) can trigger economic calamities affecting millions of people
(Kuala, Malaysia & John, 2008). Consequently, it is imperative that banks operate in a safe and sound manner to avoid
failure. One way to ensure this is for governments to provide diligent regulation of banks. Yet, with the advent of
globalization, banking activities are no longer confined to the borders of any individual country. With cross-border
banking activities rapidly increasing, the need for international cooperation in bank regulation has likewise increased
(Larson, 2011).
Regulation is defined as the public administrative policing of private activities based on a set of rules that are
developed in the public interest. Thus the process consists of intentional restrictions over a subject choice courses of
operations by an entity not directly involved in that activity. When this definition is applied to the financial system, it is
termed financial regulation and refers to a process in which there is a monitoring of the financial institutions by a body
that is directed by the government in an effort to achieve macroeconomic goals through monetary policies as well as other
measures permissible by law.
Thus regulations are concerned, they must be extensively considered and skillfully administered because in
appropriate or ineffective regulatory measures results in catastrophic economic problems (Kevin and Nicol, 2000). Recent
economic crises have revealed the importance of bank regulations to hedge against the high risk attributed to imbalances
in banks‟ balance sheets. Nonetheless, excessive regulations may have adverse effects. On the one hand, they serve as
prudential measures that mitigate the effects of economic crises on the stability of the banking system and subsequent
accompanying macroeconomic results. On the other hand, excessive regulations may increase the cost of intermediation
and reduce the profitability of the banking industry.
Simultaneously, as banks become more constrained, their ability to expand credit and contribution to economic
growth will be hampered (Naceur and Kandil, 2011). It is argued (Adam, 2005) that economists disagree on the level of
government intervention in economic and financial activities over the world while some believe that many regulations are
necessary in order to protect the depositors funds. Nevertheless, others believed that the banks are overregulated (James,
Jie & Daniel, 2004).
Banks occupy a significant place in the economy of every nation. It is therefore not surprising that their operations
are perhaps the most heavily regulated and supervised of all businesses. Central Bank of Nigeria puts different regulation
and supervision on the banking activities at different times (James, Barth & Ross, 2002). These regulations and
supervisions are intended to stabilize the country’s economic environment, but CBN seem not to consider the effect of
such regulations and supervision on the banks performance. Thus, the researcher was interested to examine the impact of
banking regulations and reserve requirements on the commercial banks’ performance in Nigeria.
1.2. Statement of the Problem
Measuring bank regulation and supervision around the world is hard. Hundreds of laws and regulations,
emanating from different parts of national and local governments, define policies regarding bank capital standards, the
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entry requirements of new domestic and foreign banks, bank ownership restrictions, and loan provision guidelines.
Numerous pages of regulations in most countries delineate the permitted activities of banks and provide shape and
substance to deposit insurance schemes and the nature and timing of the information that banks must disclose to regulators
and the public. Extensive statutes define the powers of regulatory and supervisory officials over banks and the limits of
those powers. There are daunting challenges associated with acquiring data on all of the laws, regulations, and practices
that apply to banks in countries and then aggregating this information into useful statistics that capture different and
important aspects of regulatory regimes.
The Central Bank of Nigeria is established to control the financial system and monetary policy of the country.
This monetary policy refers to a bundle of actions and regulatory stances taken by the central bank including; setting
minimum interest rates on deposits or the rediscount rate charged to commercial banks borrowing reserves, setting reserve
requirements on various classes of deposits, increasing or decreasing commercial bank reserves through open market
purchases or sales of government securities.
Furthermore, regulatory actions to constrain commercial bank financial activity or to set minimum capital
requirements, intervention in foreign exchange markets to buy and sell domestic currency for foreign exchange and decide
on the level of required reserve of commercial banks total deposit. CBN exercises control over the banking sector through
issuance of directives pertaining formation and operation of a banking business. Most of the directives on operation aim at
reducing risk of liquidity and solvency in the banking system. Some of CBN’s directives are issued as part of the central
bank’s conduct of monetary policy and some are issued to ensure that the sector plays adequate role in channeling funds
to priority sectors of the economy. It is not difficult to imagine the effect of all these requirements on banks performance.
However, our understanding of all these regulatory actions of NBE on bank performance is limited due to lack of
scientific study in the area. Therefore, this study tries to examine the effect of regulatory actions on commercial banks’
performance by answering key research questions.
1.3. Objective of the Study
The general objective of this study is to examine the role of banking regulation and reserve requirements on
commercial banks performance in Nigeria.
The specific objectives are as follows:
I. To evaluate the effect of setting up of reserve requirement on bank profitability.

II. Assess the effect of credit cap on bank performance and profitability.

III. To evaluate the impact of banking regulation on commercial bank profitability.

1.4 Research Questions

The research questions for this study are:

I. Does setting up of reserve requirement have effect on bank profitability?

II. What is the effect of credit cap on bank performance and profitability?

III. What is the impact of banking regulation on commercial bank profitability?

1.5 Significance of the Study

The study is very significances for policy makers, companies and other stakeholders. It will enable policy makers
to take deep-considerations on the impact regulations have on banks performance during policy formulation and
implementation. The results of this study will create awareness for banks about the effect of CBN regulation on their
profitability; give the opportunity to influence CBN by providing feedback during policy formulation and implementation.
This study gives the researcher the opportunity to gain deep knowledge on the impact of central bank regulations
on banks performance. In addition to the above points, the CBN can use the study or the recommendations included in this
paper as a base to improve its policy regulation after carefully evaluating its impact.
1.6 Limitations to the Study
In the course of carrying out this study, some problems were encountered which ranges from non- availability of
relevant recent data to the paucity of available ones. This display of uncooperative attitude by those who are supposed to
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be the custodian of the data, also affected this in many ways. To this extent, a considerable exercise and judgments was
necessitated in dealing with the data. Time and fund also are included in the limiting factors to the collection of adequate
data. Enough time is needed in order to travel to other financial institutions and other stakeholders in order to get adequate
information needed. This also posed a problem of finance due to transportation cost and the present economic situation in
the country.
1.7 Definitions of Terms
Monetary Control: This takes two forms: First, if reserve money cannot easily be increased, RR may restrict commercial
bank balance sheet growth. Second, the central bank could vary the level of (unremunerated) RR in a way intended to
influence the spread between deposit and lending rates, in order to impact the growth of monetary aggregates and thus
inflation.
Banking Regulation: This is the law or administrative rule issued by apex banks like the Central Bank of Nigeria (CBN),
used to guide the operations of commercial banks. The Central Bank of Nigeria puts different regulation and supervision
on the banking activities at different times. These regulations and supervisions are intended to stabilize the country’s
economic environment.
Bank Performance: This is the achievement deed, act and feat of commercial banks in line with the regulations under
which they operate.
Reserve Requirement: The reserve requirement (or cash reserve ratio) is a central bank regulation employed by most,
but not all, of the world's central banks, that sets the minimum amount of reserves that must be held by a commercial
bank. The minimum reserve is generally determined by the central bank to be no less than a specified percentage of the
amount of deposit liabilities the commercial bank owes to its customers. The commercial bank's reserves normally consist
of cash owned by the bank and stored physically in the bank vault (vault cash), plus the amount of the commercial bank's
balance in that bank's account with the central bank.

REFERENCES
Fotios, P., Chrysovalantis, G. & Constantin, Z. C. (2006). The impact of bank regulations, supervision, market structure,
and bank characteristics on individual bank ratings: A cross-country analysis. Journal of Finance, 10: 403–438.
Georgios, E., Chortareas, C. G. & Alexia, V. C. (2009). Bank supervision, regulation, and efficiency: Evidence from the
European Union. Journal of Financial Stability 8(2012): 292-302.
James R., Barth, G. C. & Ross, L. (2002). Bank regulation and supervision: What works best? Journal of Financial
Intermediation 13(2004) 205–248 Retrieved from www.sciencedirect.com
James, R. B., Jie, G. & Daniel, E. N. C. (2004). Global banking regulation and supervision: What are the issues and what
are the practices? Journal of Financial Intermediation 4(2006) 274-318.
Kevin, G. and Nicole, B. (2000). The impact of regulatory measures on commercial banks profitability in Barbados.
Kuala, L., Malaysia, J. C. H. & John, H. W. (2008). Joint determination of regulations by the regulator and the regulated:
Commercial bank requirement. Eastern Economic Journal, 34)(2): 158-171.
Kane, E. J. (2000). Designing financial safety nets to fit country circumstances. World Bank Policy Research Working
Paper, 2453.
Naceur, S. N. and Omran, M. (2008). The effect of bank regulations, competition and financial reforms on MENA banks
profitability. Working Paper Series, 449.
CHAPTER TWO

LITERATURE REVIEW

The various contents that will be used in this chapter are:

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2.1 Regulation and supervision of banks

2.2 The financial regulation

2.3 The impact of regulatory measures

2.4 Banking regulation: The risk of bank runs and of moral hazard banking and their effects on the economy

2.5 Supervisory policies and performance

2.6 The concept of reserve requirement

2.7 The purpose of reserve requirement

2.1 REGULATION AND SUPERVISION OF BANKS

Banking crises, rapid structural change, and the continuing globalization of banking have led national and
multilateral policy makers to focus increased attention on the crucial role of banking supervision. This focus is reinforced
by the fact that “one of the important [international] trends has been, and continues to be, a move away from regulation
and towards supervision.” Policy discussions specifically focus on several issues that must be addressed in establishing
and maintaining effective supervision, including who should supervise banks, i.e., the “structure” of bank supervision.
Three issues for policy makers to address with respect to the structure of bank supervision are whether there
should be a single bank supervisory authority, or multiple bank supervisors; whether the central bank should play a role in
bank supervision; and whether the supervisor responsible for the banking industry should also have responsibility for
other financial services, in particular the securities and insurance industries. How these issues are addressed is important
because policies that fail to provide for an appropriate bank supervisory framework may undermine bank performance and
even lead to full-scale banking crises (Barth et al, 2003).
Countries must also decide whether to assign responsibility for bank supervision to the central bank. As with
the issue of single or multiple bank supervisors, the conceptual literature is split on the relative advantages and
disadvantages of the central bank being a bank supervisor.
Perhaps the most strongly emphasized argument in favor of assigning supervisory responsibility to the central
bank is that as a bank supervisor, the central bank will have first-hand knowledge of the condition and performance of
banks. This in turn can help it identify and respond to the emergence of a systemic problem in a timely manner. Those
pointing to the disadvantages of assigning bank supervision to the central bank stress the inherent conflict of interest
between supervisory responsibilities and responsibility for monetary policy.
The conflict could become particularly acute during an economic downturn, in that the central bank may be
tempted to pursue a too-loose monetary policy to avoid adverse effects on bank earnings and credit quality, and/or
encourage banks to extend credit more liberally than warranted based on credit quality conditions to complement an
expansionary monetary policy. As with the single-multiple bank supervisor debate, a useful first step in addressing the
debate over the bank supervisory role of the central bank is to ascertain basic facts (Brunnermeier et al, 2009).
2.2 THE FINANCIAL REGULATIONS
Financial regulation can be classified into groups according to their aims and functions. The three most common
classifications are the following; which are outlined in (Sanders and Schumacher, 2000).
Structural regulations: These are boundaries placed on commercial banks determining the activities in which they
can participate from those from which they are debarred. Licensing of commercial banks and prohibitions from engaging
in commercial activities, are examples of structural regulations used.
Prudential regulation : This emphasizes the control of systematic risk through principally balance sheet constraint
such as capital adequacy and permissible bank concentration (share of banks asset held by a particular body or individual)
ratios; and it establishes guidelines to banks with the intension of maintaining safety and soundness of the banking system
and protecting the users of financial services. E.g. Placing limits on loan to a single borrowers or groups.
Monetary regulation: This is the process of setting monetary policy directives designed to bring about predetermined
macroeconomic outcomes by focusing on interest rates, credit controls and primary and secondary reserve requirements. It
impacts on the deposit taking and lending activities of commercial banks through adjustments in price, volume, portfolio
change and risk taking.
2.3 THE IMPACT OF REGULATORY MEASURES
Regulations impact on the very structure of the banking system since they present the stipulations and
restrictions that must be considered in the banks entire series of operations. But in terms of optimality, it remains to be
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answered whether all the restrictions in place are necessary. Bhattachyra (1998) had some notable conclusions when he
set out to survey modern literature on bank regulation, exploring the implications for optimal regulation.
Among the conclusions were:
i. Imposing restrictions on banks investment may limit the liability of the deposit insurance fund, affecting the
optimal configuration of banking and may reduce charter values as a result.
ii. Risk sensitive capital requirements and risk calibrated deposit insurance premia are potentially useful regulatory
tools in coping with moral hazard.
iii. If bank closure policy is improved and discipline brought to bear, it could attenuate the moral hazard problems
related to deposit insurance.
iv. Increasing banks charter values can also help to dampen the risk-taking propensities of the insured banks.
v. If universal banking is permitted it facilitates reusability of information and stimulates investments.
Further Bhattachyra et al suggests that restricting banks to financing themselves does not sacrifice efficiency;
bank sizes should not be restricted and financing with non traded demand deposit contracts without constraints on the
associated interest rate patterns should be permitted. Therefore, it can be concluded that although restrictions have their
place in the financial system, they are no tall beneficial o the public nor the banking system and sometimes the economy
as a whole. Measures such as interest rate ceilings and floors, exchange and credit controls and reserve requirement are
typical tools for the central bank to use in their effort to the banks. One school of thought is that where there is no deposit
rate ceilings, banks will bid up deposit interest rates which in turn will cause them to seek out higher yielding riskier
assets to justify the high deposit rates.
2.4 BANKING REGULATION: THE RISK OF BANK RUNS AND OF MORAL HAZARD IN BANKING AND
THEIR EFFECTS ON THE ECONOMY
Bonn (2005) posits that it is widely accepted that in the absence of market failures, open and competitive
markets yield strong incentives to efficiently meet the demands of consumers and to adapt to changing demands and
technology over time. With very few exceptions, in the absence of a market failure there is no economic justification for
regulation. The most important rationale for regulation in banking is to address concerns over the safety and stability of
financial institutions, the financial sector as a whole, or the payments system.
The description and the evaluation that follows necessarily reflect the views of competition authorities. With
only one exception, no bank regulator has reviewed this report, which therefore, does not necessarily reflect the positions
and the opinions of bank regulators.
The risk of bank runs: All banks operate in conditions of fractional liquidity reserve. The great majority of banks
liabilities are very liquid deposits redeemable on demand. The great majority of their assets are instead much more illiquid
loans. This situation leads to the problem that if all depositors demanded their deposits back at the same time, any bank
(even if perfectly solvent) would face serious problems in meeting its obligations vis à vis its depositors (Ghoch, 2012).
A single bank might obtain refinancing on the financial market but the problem would severely persist in cases
of low liquidity on the market or if the issue concerned a big portion of the banking sector. It is well known in the
literature that whenever depositors start fearing the insolvency of their bank, their first most common reaction is to go and
withdraw their deposits creating serious problems to the banks. Such behavior is normally referred to as a bank run.
The risk of excessive risk taking (moral hazard) in banking: Banks grant loans normally financed by the deposits they
received. This is by itself a powerful incentive for banks to grant credit in a not sufficiently prudent way and to take in too
much risk. In fact it is well known in the literature that with debt financing, while the risk of failure of the financed
investment is mostly carried out by the bank depositors, in the case of success profits accrue mostly to the bank. In
general, however, this incentive is somehow mitigated by the possibility that the market, both via depositors and via other
banks, could monitor the risks assumed by the bank’s management. The main purpose of regulation is to avoid the highly
negative consequences for the economy of widespread bank failures. There are two main strands of arguments for banking
regulation. The first focuses on the systemic dangers of bank failures, while the second on the need for security and
stability in the payments system.
Systemic dangers of a bank failure: The main argument for bank regulation focuses on the possibility of systemic or
system-wide consequences of a bank failure i.e. the possibility that the failure of one institution could lead to the failure of
others. This argument is summarized by Feldstein as follows: “The banking system as a whole is a „public good‟ that
benefits the nation over and above the profits that is earns for the banks‟ shareholders. Systemic risks to the banking
system are risks for the nation as a whole (Diamond and Rajan, 2000).
Although the management and shareholders of individual institutions are, of course, eager to protect the
solvency of their own institutions, they do not adequately take into account the adverse effects to the nation of systemic
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failure. Banks left to them will accept more risk than is optimal from a systemic point of view. That is the basic case for
government regulation of banking activity and the establishment of capital requirements”.
It is possible to distinguish two mechanisms by which the failure of one bank could lead to the failure of other
banks or other non-bank firms: (a) The failure of one bank leading to a decline in the value of the assets sufficient to
induce the failure of another bank (“consequent failure”) and (b) The failure of one bank leading to the failure of another
fully solvent bank, through some contagion mechanism (“contagion failure”).

2.5 SUPERVISORY POLICIES AND PERFORMANCE

Given the interconnectedness of the banking industry and the reliance that the national and global economy hold
on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions,
government regulation and supervision of banks promotes their safety and soundness in order to protect the payments
system from bank runs that contract bank lending and threaten macroeconomic stability. Protecting the payments system
frequently involves deposit insurance. To the extent that the insurance is credible, it reduces depositors‟ incentive to run
banks when they fear banks‟ solvency. Consequently, it reduces banks‟ liquidity risk and, to the extent it is underpriced,
gives banks the incentive to take additional risk for higher expected return (Alexandru and Romanescu, 2008).
Theoretical and policy debates: As cited Bonn (2005) this section discusses seven policy issues. For each issue, the
researcher : (1) stress the conflicting theoretical predictions and policy debates, (2) emphasize that specific regulations and
supervisory practices are so inextricably interrelated it is important to examine them simultaneously. Regulations on
bank activities and banking-commerce links: There are five main theoretical reasons for restricting bank activities and
banking commerce links. First, conflicts of interest may arise when banks engage in such diverse activities as securities
underwriting, insurance underwriting, and real estate investment.
Such banks, for example, may attempt to “dump” securities on ill-informed investors to assist firms with
outstanding loans. Second, to the extent that moral hazard encourages riskier behavior, banks will have more opportunities
to increase risk if allowed to engage in a broader range of activities. Third, complex banks are difficult to monitor. Fourth,
such banks may become so politically and economically powerful that they become “too big to discipline.” Finally, large
financial conglomerates may reduce competition and efficiency. According to these arguments, governments can improve
banking by restricting bank activities.
There are alternative theoretical reasons for allowing banks to engage in a broad range of activities, however.
First, fewer regulatory restrictions permit the exploitation of economies of scale and scope. Second, fewer regulatory
restrictions may increase the franchise value of banks and thereby augment incentives for more prudent behavior. Lastly,
broader activities may enable banks to diversify income streams and thereby create more stable banks.
Regulations on domestic and foreign bank entry: Economic theory provides conflicting views on the need for and the
effect of regulations on entry into banking. Some argue that effective screening of bank entry can promote stability.
Others stress that banks with monopolistic power possess greater franchise value, which enhances prudent risk-taking
behavior Others, of course, disagree, stressing the beneficial effects of competition and the harmful effects of restricting
entry (Almunani, 2013).
Regulations on capital adequacy: Traditional approaches to bank regulation emphasize the positive features of capital
adequacy requirements. Capital serves as a buffer against losses and hence failure. Furthermore, with limited liability, the
proclivity for banks to engage in higher risk activities is curtailed with greater amounts of capital at risk. Capital adequacy
requirements, especially with deposit insurance, play a crucial role in aligning the incentives of bank owners with
depositors and other creditors.
Deposit insurance design: Countries adopt deposit insurance schemes to prevent widespread bank runs. If depositors
attempt to withdraw their funds all at once, illiquid but solvent banks may be forced into insolvency. To protect payment
and credit systems from contagious bank runs, many favor deposit insurance plus powerful official oversight of banks to
augment private-sector monitoring of banks. Deposit insurance schemes come at a cost, however. They may encourage
excessive risk-taking behavior, which some believe offsets any stabilization benefits. Yet, many contend that regulation
and supervision can control the moral-hazard problem by designing an insurance scheme that encompasses appropriate
coverage limits, scope of coverage, coinsurance, funding, premier structure, management and membership requirements.
2.6 THE CONCEPT OF RESERVE REQUIREMENT
Most central banks oblige depository institutions (commercial banks) to hold minimum reserves against their
liabilities, predominantly in the form of balances at the central bank. The role of these reserve requirements has evolved
significantly over time. The overlay of changing purposes and practices has the result that it is not always fully clear what
the current purpose of reserve requirements is, and this necessarily complicates thinking about how a reserve regime
should be structured.
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In deciding the precise structure of reserve requirements (if any), it is important for a central bank to be clear
what the intended goals are. Since different goals may require different structures, the central bank may need to choose
which goals to prioritize. For example, reserve averaging is a powerful liquidity management tool, but giving primacy to
this goal undermines the prudential aspect since a bank could, if under pressure, run down reserves for a period and so not
have any left when trouble arrived. Similarly, one of the benefits of reserve averaging is that it reduces the need for
‘excess’, or precautionary, reserves, effectively reducing the demand for central bank balances: this could be an issue if
reserve requirements are being used as a means of immobilizing surplus reserves. Remuneration of reserves reduces or
eliminates a distortionary tax and reduces incentives on the financial system to avoid reservable liabilities, but will also
weaken or eliminate the impact of RR on interest rate spreads in the market (Iman and Harun, 2011).
These reserve requirements (also known as legal or statutory reserves) are invariably calculated by reference to
a commercial bank’s liabilities. Reserve requirements must be held in the form of a reliable asset: historically, in gold, but
now typically in central bank money. Central bank (or “reserve” or “base”) money refers to domestic–currency central
bank money used in an economy, and is defined as currency in issue2 plus commercial bank balances held at the central
bank. There will be some voluntary holding of reserve money in any economy, regardless of the central bank’s policy on
reserve requirements.
In virtually all countries there is a certain level of demand for the ability to settle large–value transactions in
central bank money, and this effectively means the banking sector will voluntarily hold reserve (or settlement) account
balances at the central bank. The volume of reserves voluntarily held is clearly likely to be higher if such balances are
remunerated. It is also likely to vary over time, reflecting short-term factors (e.g. seasonally high transactions volumes) or
longer-term developments (e.g. infrastructure improvements).
Some central banks aim to set reserve requirements above the voluntarily–held level because this can create a
predictable demand for reserves balances. Provided the level is not too high, and reserve requirements are remunerated,
the distortionary impact may not be significant. Demanded reserves will be the higher of voluntarily–held required and
levels. In a number of countries, the actual level of reserves exceeds the demanded level, sometimes substantially.
Banks may voluntarily hold excess reserves, but by definition will not want to hold surplus reserve balances;
so excess reserves are by definition equal to or greater than surplus reserves. Excess reserves can be easily observed by
the central bank: they can be calculated simply by comparing the required level against actual reserve balances held. By
contrast, surplus reserves are harder to observe accurately, in part because the demanded level varies from time to time.
Banks’ efforts to dispose of surplus reserves will tend to lead to an easing of monetary conditions (Kovanen, 2002). Either
those efforts push down short–term interest rates as banks try to lend out the funds; or because they weaken the exchange
rate as banks try to sell surplus domestic currency balances.
Central banks therefore need to estimate the level of surplus reserves in order to determine what action, if any,
is necessary to prevent an unwanted monetary impact. If actual reserves are below demanded levels, the response of banks
in bidding for reserve money will imply a tightening of monetary conditions. Central banks can of course counter any
undesired tightening by providing reserves to the system. The stance of monetary policy may be signaled by the
remuneration rate on excess reserves, rather than by the rate for central bank open market operations or an announced
target market rate. This approach is sometimes referred to as a “floor” system, as there is an expectation that short–term
market rates will trade around the floor of the interest rate corridor, rather than in the middle.
2.7 THE PURPOSE OF RESERVE REQUIREMENTS
A. Prudential
Reserve requirements ensure that banks hold a certain proportion of high quality, liquid assets. In the days of
the gold standard, banks might hold gold—either directly or with another bank— as backing for deposits received or notes
issued,4 but reserves cover could only be partial if banks were to conduct any lending business funded by deposits. This
structure of partial reserve cover is sometimes referred to as “fractional banking”—banks held reserve assets equivalent to
a fraction of their liabilities—particularly short–term liabilities, where outflows could happen most rapidly and liquidity
cover was therefore most important.
Initially the level of reserve cover was voluntary, but over time these reserves were centralized in central banks,
which mandated the level of reserve coverage required. In the United States, from early in the 19th century until 1863
when the National Bank Act was introduced (setting reserve requirements for banks), many banks held reserves—
typically, gold or its equivalent—informally with other commercial banks in return for an agreement by that bank to
accept their banknotes.5 Individuals would be more willing to use notes issued by Bank A if they knew that issuance was
backed (if only partially) by reserves, and that at least some other banks would accept those notes; and Bank B would
clearly be more willing to accept Bank A’s notes if they had some reliable backing. This is similar to ideas discussed by
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Bagehot in Lombard Street (1863), where he suggests that banks should hold more than enough reserves—essentially,
gold or balances at the central bank—to meet likely short–run demand (Iman and Harun, 2011).
Short–run demand—a net drain on the banking system’s reserves—could come from two sources: the need to
make payments abroad, or a domestic panic. In the case of an international drain, foreign currency (or gold) is needed, and
interest rates may be increased to reverse the drain. In the case of a domestic drain, central bank lending of domestic
reserve money is required. In the post gold standard world, domestic currency reserves are only likely to be able to cover
domestic liquidity needs. Reserves to cover international needs belong to the sphere of foreign exchange reserves
management, where different policy issues arise.
The fractional reserve approach gave added confidence to the use of private sector money (such as notes issued
by commercial banks). It was bolstered by the banks’ ability, over time, to resort to borrowing from the central bank.
Until the 20th century, this was largely informal (Bagehot complains in ‘Lombard Street’ of the importance of such a role
in the United Kingdom being entrusted to the Bank of England without any parliamentary authority or government
guidance). In the United States, the creation in 1913 of the Federal Reserve Bank system meant that a reliable central bank
could lend “reserves” (here meaning: central bank balances, which could if necessary be converted into gold) to member
banks. This form of support is primarily related to liquidity, as it would allow commercial banks, up to a point, to cope
with a bank run. But it also has elements of solvency, since the reserves held by the commercial banks with the central
bank should be of the highest credit quality.
But the prudential and ‘safety net’ benefits are in most cases now covered— more effectively—by a
combination of supervision and regulation (with appropriate capital adequacy and liquidity requirements), deposit
insurance, and standing credit facilities provided by the central bank. Moreover, as discussed below, the prudential role of
reserves is substantially weakened where reserve averaging is permitted. In 2010, over 80 percent of central banks
permitted at least some element of reserve averaging. Where the prudential (liquidity and solvency) goals of reserve
requirements can be met more effectively and efficiently with other approaches, the prudential role of reserve
requirements may be outdated.
Central bank balances will still likely form part of the liquidity management of commercial banks, but a
standardized administrative requirement on all banks is not obviously the best way to promote this. Supervisors would
certainly be expected to count central bank balances as highly liquid assets, and would expect banks—particularly those
with important business in the large value payment system of the country—to hold a certain level of central bank
balances. But other assets would also likely be included, such as short– term government securities (Kovanen, 2002).
In many countries, banking regulation and supervision is not a central bank task. This raises an interesting
question: remuneration of reserve balances provides an incentive for banks to hold reserve balances, but may not be the
appropriate way to motivate the holding of balances for prudential purposes, since the central bank may not be the
supervisor. While remuneration of reserve requirements (or an agreed level of reserves) does not have a direct monetary
policy impact, a non–central bank supervisor could not require the central bank to pay a certain rate of return on reserves.
On the other hand, the central bank as overseer of the large value payment system (this is typically a central bank
function) has an interest in ensuring that members of the payment system have sufficient liquidity — whether reserve
balances or access to credit (such as the central bank’s standing credit facility)—to ensure the risk of disruption to
payments is minimized. If reserve requirements were used to support payment system liquidity, then logically they should
apply to all members of the payment system, whether banks or not.
B. Monetary Control
The uses of RRs for monetary control are normally described in terms of two channels : the money multiplier
and the impact of reserve requirements on interest rate spreads. The money multiplier approach assumes that banks
increase their loan portfolios until constrained by reserve requirements, on the assumption that the supply of reserves is
constrained. If a minimum fraction of commercial bank borrowing needs to be covered by reserves (gold), then the
availability of reserves (gold) must necessarily limit bank borrowing, and thereby its capacity to lend. (Credit funded by
non–reservable liabilities would not be so constrained.) Under a currency board system (or the gold—or other specie—
standard), reserve money creation is constrained by the requirement that it be backed by specified assets. Central bank
purchase of foreign exchange or gold provides an external backing to reserve money; the purchase of government
securities may also provide backing, but is closer to secured lending. If reserve creation is constrained, a higher reserve
requirement would then necessarily force a reduction in lending, while a lower requirement would permit an increase. But
this description does not reflect modern central banking practice (Flaminin et al, 2009). Once “reserves” comes to mean
“balances at the central bank,” the central bank can easily accommodate any increase in the demand for reserves—
provided banks hold adequate- collateral—since it can create them.
 9

Using control over reserve money to guide credit growth in a fiat money system is in practice an indirect
means of using interest rates. Instead of restricting the availability of reserve money completely – an action that could
provoke fails in the payment system – central banks in many countries restricted the amount of reserves which could be
funded at or around the policy interest rate. Assume for instance that a central bank estimates the market to be short of 100
in reserve balances. It could lend 100 via its OMO at market rates (assuming that market rates are in line with the policy
target). Or if it wanted market rates to rise, it could lend only 50 via OMO at market rates, forcing banks to fund the
remaining 50 via the standing credit facility. If banks had to borrow larger amounts at the higher standing credit facility
rate (the Discount, or Lombard, or Bank Rate) their overall cost of funding would rise, and this would be passed on to
customers.
However, in recent years central banks have increasingly adjusted the policy rate explicitly rather than
expecting the market to infer it from the balance of reserves supplied between OMO and a standing credit facility, and
taken an accommodative approach to reserve money supply (so that the expectation is that the standing credit facility will
almost never be used). This allows a distinction to be made between the monetary policy stance and reserve money (or
liquidity) management.
The discussion applies also to situations of a structural surplus of reserve balances. The central bank could aim
to drain the surplus via OMO, at or around the targeted market rate and change the announced rate if a change in policy
stance was required; or drain only part of the surplus via OMO, leaving the remainder to be remunerated at the interest on
excess reserves/standing deposit facility rate. The result would be that market interest rates would be expected to fall
below the policy rate. Reserve requirements which are unremunerated, or at least remunerated substantially below
prevailing market rates, should impact the spread between commercial banks’ deposit and lending rates.
Banks need to set a certain spread between deposit and lending rates to cover overheads and allow for a profit;
unremunerated reserve requirements add to this spread. The intuition here is simple: if a proportion of assets backing a
deposit liability has to be held as non–interest bearing balances at the central bank, then the average interest rate charged
by the bank on its other assets must be correspondingly higher than the average rate paid on its deposits. The imposition
of unremunerated reserve requirements will mean that deposit rates are lower than they otherwise would have been, or
lending rates higher, or both.
An increase in unremunerated reserve requirements is normally viewed as a monetary policy tightening and
vice versa; but the impact is not the same as an increase in official interest rates. To the extent that higher unremunerated
reserve requirements lead to higher lending rates, the monetary policy stance is clearly tightened. But some of the impact
will be passed through to deposit rates (unless they are at or near the zero lower bound), and it is not so obvious that lower
deposit rates represent a monetary policy tightening. Moreover, reserve requirements only have a direct impact on
institutions subject to the reserve requirements regime—typically, banks—and so may have an uneven impact compared
with changes in official interest rates, which should feed through more predictably to all financial markets (Bonn, 2005).
The difference in impact between raising policy interest rates and raising unremunerated reserve requirements
does offer potential benefits to the use of unremunerated reserve requirements. An increase in unremunerated reserve
requirements has occasionally been used, depending on the financial market structure, to allow the central bank to tighten
monetary policy without encouraging short–term capital inflows. In recent years, a number of central banks have faced
capital inflows which put (unwelcome) upwards pressure on the exchange rate and also help to fuel domestic demand,
thus putting upwards pressure on inflation. Increasing reserve -requirements, however, might increase lending rates (and
so reduce demand) without increasing the deposit rates, and so avoid attracting more capital inflows. The higher
unremunerated reserve requirement is a form of taxation, and since it is not matched by expenditure, should reduce net
demand. Some central banks have used a marginal unremunerated reserve requirement as a temporary measure to tackle
strong credit growth or lean against capital inflows which increase deposits in the banking system. A marginal
unremunerated reserve requirement could be set at 100 percent or more: this can quickly drain surplus reserve balances,
and imposes a high cost on marginal loans, while having relatively little direct impact on banks which do not increase
their balance sheet size.
A high marginal unremunerated reserve requirement on non–resident deposits in domestic currency has been
used as a form of capital control. The term “unremunerated reserve requirement” is also sometimes used to refer to an
effective tax on foreign exchange capital inflows; but in this case it is applied to flows of foreign exchange into the
domestic currency, regardless of the route, rather than to stocks of deposit liabilities with commercial banks.
Unremunerated reserve requirements on bank deposit liabilities will be less effective in discouraging capital inflows, if
those inflows are not intermediated by banks, but instead are in the form of the purchase of securities—whether
government, central bank or corporate securities—in which case the capital inflows will benefit from a generalized
increase in borrowing rates. This would indicate that the use of unremunerated reserve requirements to target particular
 10

flows would need to take careful account of the structure not only of current financial flows, but also of the scope for
short–term flows to be re–routed to avoid, or even take advantage of, the impact of a change in unremunerated reserve
requirements (Barth et al, 2003).
Changes in unremunerated reserve requirement s tend to be seen as a relatively imprecise means of
implementing monetary policy. In most countries reserve requirements are not changed frequently—indeed changing
them more than once a year is relatively unusual—and normally can only be changed with a lag e.g., from the next reserve
maintenance period. In addition, their impact may be limited. Banks and other financial institutions have an incentive to
reduce the taxation–impact of unremunerated reserve requirements by evading them. If unremunerated reserve
requirements lead to a disintermediation of the banking sector, pushing business possibly to less–regulated channels, the
consequence may be to distort markets and weaken financial stability, rather than to influence deposit and lending rates
actually used in the economy. Where reserve requirements are non–binding—if banks hold and are likely to continue to
hold excess reserves—their incentive to reduce the impact of unremunerated reserve requirements is of course reduced.
But it is cold comfort if banks do not seek to avoid unremunerated reserve requirements largely because they have no
impact.
C. Liquidity Management
Averaging of reserve balances: Averaging” means that a bank’s average end–of–day reserve balance over a given period
(the reserve maintenance period, RMP) must be equal to or above the required level; but that on any individual day it can
be lower or higher. If averaging of reserve requirements is permitted, this can be a very effective way of supporting
commercial banks’ own short–term liquidity management. Averaging can be particularly useful when it is hard for the
central bank to forecast accurately all flows across its balance sheet, since averaging creates an intertemporal liquidity
buffer to offset errors in the central bank’s forecast.
If a bank is indifferent whether it holds a reserve balance today or tomorrow, then it should be prepared to lend
in the interbank market if rates are above the level expected for the remainder of the RMP (since it would expect to be
able to borrow more cheaply later on), or to borrow if rates are low (since it would expect to be able to lend at a higher
rate later on). Both actions would tend to keep overnight market rates at the targeted level. But a bank would not borrow
when it was expensive, or lend at a low rate, if it could instead vary its reserve level to accommodate swings in liquidity.
Since averaging helps to balance supply and demand, it should reduce the impact of short–term (and economically
insignificant) liquidity swings on overnight market rates (Arif and Anees, 2012). This liquidity benefit exists whether or
not reserve requirements are remunerated.
Reserve requirement can be used to create a stable ‘demand’ for reserve balances, and for many advanced
economy central banks this would appear to be the main justification for continued use of reserve requirement. The
voluntary demand for reserve balances tends to be unstable: it will vary depending on short–term liquidity flows, changes
to the structure of the wholesale payment system, or – currently – the impact of economic shocks on precautionary
demand.
Forecasting voluntary demand in order to manage liquidity accurately would be difficult. But if reserve
requirements are set substantially above voluntary demand, then the banking system’s actual demand for reserves should
become very predictable. Prior to the recent financial crisis, this was most obviously done by the Eurosystem. If this is the
justification, there is still merit in reviewing the level of reserve requirement periodically. Even if there is no interest rate
cost – to the extent the IORR equals the short–term policy OMO rate—a high unremunerated reserve requirement level
drains a substantial amount of collateral from the market. If the collateral is constituted by highly–liquid securities, the
securities market may be impacted; but accepting illiquid collateral for regular OMO may reduce the incentive for banks
to hold and manage well–traded securities and could motivate banks with less liquid assets to bid heavily for central bank
funds (possibly influencing the OMO rate).
Since the facilitation of liquidity management should reduce short–term interest rate volatility—to the extent
that volatility is the product of unanticipated liquidity shocks—it can promote interbank trading and support capital
market development. It may appear counterintuitive that averaging might promote interbank trading, since a bank can
meet an unexpected shortage today by running down its reserve balance, instead of borrowing on the interbank market.
But the short–term buffer provided by averaging means that banks may be more relaxed about making interbank loans,
since they should be more confident of their ability to manage short–term liquidity shocks. In practice, the introduction of
averaging tends to be neutral to positive to the volume of interbank trading (Almunani, 2013).
Sterilizing surplus reserve balances: If there are surplus reserve balances in the economy, increasing the level of
unremunerated (or under–remunerated) unremunerated reserve requirements may seem like a cheap way of sterilizing the
impact of the surplus. The alternative – draining through OMO or paying IOER— represent a cost to the central bank.
Central banks are, of course, policy–driven rather than profit–oriented institutions, but concerns about a weak balance
 11

sheet and the consequences of running a loss are nevertheless real. Many central banks which have been battling with the
management of surplus reserves in recent years feel under some pressure to find instruments which reduce the cost to the
central bank, and therefore find increases in unremunerated reserve requirements to be tempting. But increasing
unremunerated reserve requirements tends to encourage financial disintermediation, reducing their effectiveness. This
may particularly be the case if reserve requirements are set on a relatively narrow liability base: a restructuring of a bank’s
liabilities may evade unremunerated reserve requirements.
Voluntary reserves: A small number of central banks do not impose reserve requirements. Where there is no reserve
requirements, the central bank can allow the market to operate with very low balances (Canada), or use remuneration to
motivate banks to hold a reasonable level of reserves (Australia, New Zealand), or agree a contractual level of
remunerated reserves, so that while the level of reserves is essentially voluntary, demand within a given period is
predictable (the United Kingdom). The level of reserves held by the banking system as a whole is largely a function of the
central bank’s decision (to the extent it can control its balance sheet); but individual banks have some choice over the
level of reserves they hold. If the level chosen by the central bank exceeds aggregate voluntary demand, short–term rates
will tend to fall (and vice versa if the level supply falls below demanded levels). Canada and Mexico target a zero
overnight reserves balance; this does require frequent OMO to keep reserve balances on track.
Where there are no required reserves, the central bank can clearly influence the demand for reserves by the
structure of its operational framework. Of key importance is the remuneration rate of reserves. One might expect the
opportunity cost also to be affected by the collateral policy of the central bank (assuming here that the market as a whole
is structurally short of reserves and so must borrow from the central bank). Consider two possibilities: Central Bank ‘A’
will accept only government securities as collateral, while Central Bank ‘B’ will accept any performing asset held by the
commercial banks; and assume that government securities earn a lower rate of return than other assets, reflecting their
strong credit and liquidity properties.
The overall cost of borrowing from Central Bank ‘A’ will be higher than from Central Bank ‘B’, even if they
both lend at the same interest rate; and through market arbitrage, we would therefore expect market rates for Central Bank
A’s currency to be somewhat higher than for Central Bank ‘B’. However, if both targeted the same overnight interbank
rate, Central Bank A’s OMO lending rate would tend to be somewhat lower than for Central Bank ‘B’. If the lower OMO
lending rate offset the higher opportunity cost of the collateral used, the overall cost of reserve holding would be
equalized.
REFERENCES
Alexandru, C. G., & Romanescu, M. L. (2008). The assessment of banking performances – Indicators of performance in
bank area. University Library of Munich, Germany.
Almumani, M. A. (2013). Liquidity risk management: A comparative study between Saudi and Jordanian banks.
Interdisciplinary Journal of Research in Business, 3(02): 1-10.
Arif, A., & Anees, A. N. (2012). Liquidity risk and performance of banking system. Journal of Financial Regulation and
Compliance, 20(2), 182-195.
Barth, R, Nolle, E, Phumiwasana, T and Yago, G (2003). A cross-country analysis of the bank supervisory framework and
bank performance. Financial Markets, Institutions & Instruments, 12.
Bhattacharya, S. (1998). The economics of banking regulation. Journal of Money Credit and Banking, 30(4): 745-770.
Bhattacharya, S. and Thakor, A. V. (1993). Contemporary banking theory. Journal of Financial Intermediation 3, 2-50.
Bonn, L. (2005). An increasing role for competition, In The Regulation Of Banks International Competition Network
Antitrust Enforcement In Regulated Sectors Subgroup 1.
Brunnermeier, C., Goodhart, D. P. and Shin, H. (2009) The fundamental principles of financial regulation. International
Center for Monetary and Banking Studies.
Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. The Journal of Finance, 55(6), 2431-2465.
Flamini, V.C., McDonald & Schumacher, L. (2009). The determinants of commercial bank profitability in sub-saharan
Africa. IMF Working Paper, (International Monetary Fund, African Department, WP/09/15).
Ghoch, A. (2012). Managing risks in commercial and retail banking. New Jersey: John Wiley & Sons.
Iman, G. and Cicilia, A. H. (2011). Revitalizing reserve requirement, In Banking Model. The SEACEN.
Kovanen, A. (2002). Reserve requirements on foreign currency deposits in Sub – Saharan Africa – Main features and
policy implication. IMF Working Paper /02/65.
Saunders, A. and Schumacher, L. (2000). The determinants of bank interest rate margins: An international study. Journal
of International Money and Finance, 19(6): 813-832.
 12

CHAPTER THREE
3.0 RESEARCH DESIGN AND METHODOLOGY
3.1 Research Design
According to Ozo J.U, Odo P.O. et al (1999), to design in language of research project means to plan or an
approach the researcher has agreed to use in solving the research problem. This plan is essential in inquiring into banking
regulation in Nigeria and it’s impact on commercial banks.
The researcher outlines the method used in collecting and analyzing data and how these methods has lead to
appropriate solution of the research questions and test of hypotheses formula. This work was designed in a way that would
ensure that the researcher obtains data vividly, actually, objectively and economically as possible to government and
member of the public.
3.2 Sources of Data
The researcher used secondary data for this study. Secondary data are data which are from an intensive of past
data relating to the study. It refers to already processed data published or recorded for future use or for proper
documentation. A pool of materials were collected and synthesized by the researcher from which his own personal view
and interpretation was brought into the work. These materials were mainly from published and unpublished works, books,
journals, and internet materials.
3.3 Location of Study
The study carried out on banking regulations, using Ecobank Nnewi as the focal bank. The data to be generated
for analysis will be drawn from this area.
3.4 Method of Data Collection
To effectively collect data, the copies of questionnaire prepared for this study will be randomly
administered to the sample size of one hundred and fifty (150) respondents. All the information or responses
generated from the 150 respondents could be taken to be generally applicable to the entire population of study.
This is because the selected sample size gives maximum representation of the entire population.
 13

CHAPTER FOUR
RESEARCH FINDINGS
This research is carried out on the analysis of external debt and economic growth in Nigeria. This section deals with the
presentation, analysis and interpretation of data as presented as well as in words. A total of two hundred and twenty (220)
copies of questionnaire were administered to respondents and were collected.

4.2 Analysis of Research Questions

Research Question One:

Does setting up of reserve requirement have effect on bank profitability?

Table 4.1: Whether setting up of reserve requirement has effect on bank profitability

Responses Frequency Percentage

Yes 79 52.7%

No 36 24%

Can’t say 35 23.3%

Total 150 100%

Source: Field Survey 2017

The table indicates that 79(52.7%) respondents are of the view that setting up of reserve requirement has effect on bank
profitability; 36(24%) respondents said “No”, while 35(23.3%) respondents have no idea.

Research Question Two:

What is the effect of credit cap on bank performance and profitability?

Table 4.2 The effect of credit cap on bank performance and profitability

Responses Frequency Percentage

High 90 60%

Very high 51 34%

Low 6 4%

Very low 3 2%

Total 150 100%

Source: Field Survey 2017

The analysis in the table shows that 90 respondents representing 60% are of the opinion that the effect of credit cap on
bank performance and profitability is high; 51(34%) said it is very high; 6(4%) said it is low, while 3 respondents
representing 2% said it is very low.
 14

Research Question Three:

What is the impact of banking regulation on commercial bank profitability?

Table 4.3: On the impact of banking regulation on commercial bank profitability

Responses Frequency Percentage

Positive 65 43.3%

Negative 59 39.3%

Neutral 26 17.4%

Total 150 100%

Source: Field Survey 2017

The table indicates that 65(43.3%) respondents said that the impact of banking regulation on commercial bank
profitability is positive; 59(39.3%) said it is negative, while 26(17.4%) respondents said it is neutral.

4.3 Discussing of Result

In all three research questions wee analysed in this study. Research question one focused on whether setting up
of reserve requirement has effect on bank profitability. The table indicates that 79(52.7%) respondents are of the view that
setting up of reserve requirement has effect on bank profitability; 36(24%) respondents said “No”, while 35(23.3%)
respondents have no idea. This shows that setting up of reserve requirement has effect on bank profitability.

Research question two centred on the effect of credit cap on bank performance and profitability. The analysis in
the table shows that 90 respondents representing 60% are of the opinion that the effect of credit cap on bank performance
and profitability is high; 51(34%) said it is very high; 6(4%) said it is low, while 3 respondents representing 2% said it is
very low. This indicates that the effect of credit cap on bank performance and profitability is high.

The main discourse in research question three is on the impact of banking regulation on commercial bank
profitability. The table indicates that 65(43.3%) respondents said that the impact of banking regulation on commercial
bank profitability is positive; 59(39.3%) said it is negative, while 26(17.4%) respondents said it is neutral. This means that
the impact of banking regulation on commercial bank profitability is positive.

CHAPTER FIVE

SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION

5.1 Summary of Findings
This study is aimed at appraising the effect of regulation and reserve requirements on the activities and
performance of commercial banks in Nigeria. This chapter attempts a summary of the research findings and offers the
conclusions and recommendations of the researcher. The research examined the role played by the regulatory authorities
towards a healthy supervision of the operation of banks in Nigeria and also examined the tools, scope, methods and policy
framework of supervision. The research theme was guided by three hypotheses which questioned the efficacy or otherwise
of the functions of the regulators and hoe regulatory activities and policies affect the performance of commercial banks.
The research borrowed heavily from related research material which was appropriately referenced. It adopted a
questionnaire based method of evaluation, testing the efficacy of each hypothesis using the Chi-square method and
comparing the result with empirical statistical evidences in order to form a basis of opinion.

5.2 Conclusion
From the investigation carried out by the researcher, the study deduced that supervisory and the regulatory
functions of the CBN have not been effective in curtailing distress in the Nigerian banking system. Depositors’ confidence
in the banking system needs to be encouraged through an integrated process involving all stakeholders. The Supervisory
and Regulatory activities of the CBN have impacted positively on the pricing of banks’ products to their external
customers. It has also not been effective in improving Corporate Governance issues in the Nigerian banking industry.
Effective regulations and supervisions of the CBN would boost the volume and the value of transactions
witnessed in the Nigerian banking industry. The Regulatory and Supervisory functions of the CBN have not stemmed the
 15

incidence of widespread bad loan portfolio in the Nigerian banking system. From the analysis, most respondents were of
the view that the Regulatory and Supervisory functions of the CBN have not stemmed the distress syndrome in the
Nigerian banking industry.
5.3 Recommendations
Based on the findings of this study, the following recommendations have been made:
 The banking supervisory structure currently being pursued by the regulatory authorities should stay with some slight
modification.
 Banking laws, rules and regulations should be harmonized for adoption and execution by all licensed banking
institutions.
 Committee of Banking Supervisory Authority (CBSA) should be established with an administrative secretariat to
meet quarterly, if not more frequently and review ways for effective banking regulation.
 The existence of the CBSA in line with the consolidation initiative would relate with the regulatory authorities of
other nations in West Africa (as a take-off initiative) and this would ease cross-border growth of banks within the sub-
region.
 There should be the enforcement of effective monitoring of bank returns.
 There should also be the enforcement of stringent minimum standards for the ownership and management of banking
institutions.
BIBLIOGRAPHY
Alexandru, C. G., & Romanescu, M. L. (2008). The assessment of banking performances – Indicators of performance in
bank area. University Library of Munich, Germany.
Almumani, M. A. (2013). Liquidity risk management: A comparative study between Saudi and Jordanian banks.
Interdisciplinary Journal of Research in Business, 3(02): 1-10.
Arif, A., & Anees, A. N. (2012). Liquidity risk and performance of banking system. Journal of Financial Regulation and
Compliance, 20(2), 182-195.
Barth, R, Nolle, E, Phumiwasana, T and Yago, G (2003). A cross-country analysis of the bank supervisory framework and
bank performance. Financial Markets, Institutions & Instruments, 12.
Bhattacharya, S. (1998). The economics of banking regulation. Journal of Money Credit and Banking, 30(4): 745-770.
Bhattacharya, S. and Thakor, A. V. (1993). Contemporary banking theory. Journal of Financial Intermediation 3, 2-50.
Bonn, L. (2005). An increasing role for competition, In The Regulation Of Banks International Competition Network
Antitrust Enforcement In Regulated Sectors Subgroup 1.
Brunnermeier, C., Goodhart, D. P. and Shin, H. (2009) The fundamental principles of financial regulation. International
Center for Monetary and Banking Studies.
Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. The Journal of Finance, 55(6), 2431-2465.
Flamini, V.C., McDonald & Schumacher, L. (2009). The determinants of commercial bank profitability in sub-saharan
Africa. IMF Working Paper, (International Monetary Fund, African Department, WP/09/15).
Fotios, P., Chrysovalantis, G. & Constantin, Z. C. (2006). The impact of bank regulations, supervision, market structure,
and bank characteristics on individual bank ratings: A cross-country analysis. Journal of Finance, 10: 403–438.
Georgios, E., Chortareas, C. G. & Alexia, V. C. (2009). Bank supervision, regulation, and efficiency: Evidence from the
European Union. Journal of Financial Stability 8(2012): 292-302.
Ghoch, A. (2012). Managing risks in commercial and retail banking. New Jersey: John Wiley & Sons.
Iman, G. and Cicilia, A. H. (2011). Revitalizing reserve requirement, In Banking Model. The SEACEN.
James R., Barth, G. C. & Ross, L. (2002). Bank regulation and supervision: What works best? Journal of Financial
Intermediation 13(2004) 205–248 Retrieved from www.sciencedirect.com
James, R. B., Jie, G. & Daniel, E. N. C. (2004). Global banking regulation and supervision: What are the issues and what
are the practices? Journal of Financial Intermediation 4(2006) 274-318.
Kane, E. J. (2000). Designing financial safety nets to fit country circumstances. World Bank Policy Research Working
Paper, 2453.
Kevin, G. and Nicole, B. (2000). The impact of regulatory measures on commercial banks profitability in Barbados.
Kovanen, A. (2002). Reserve requirements on foreign currency deposits in Sub – Saharan Africa – Main features and
policy implication. IMF Working Paper /02/65.
Kuala, L., Malaysia, J. C. H. & John, H. W. (2008). Joint determination of regulations by the regulator and the regulated:
Commercial bank requirement. Eastern Economic Journal, 34)(2): 158-171.
Naceur, S. N. and Omran, M. (2008). The effect of bank regulations, competition and financial reforms on MENA banks
profitability. Working Paper Series, 449
 16

Saunders, A. and Schumacher, L. (2000). The determinants of bank interest rate margins: An international study. Journal
of International Money and Finance, 19(6): 813-832.