Banking System Stability and Economic Growth in Nigeria: A Bounds Test to Cointegration

This research examined the impact of banking system stability on the Nigerian economy alongside key macroeconomic variables. The study employed banking stability index, return on assets, financial depth and interest rate, while real GDP was used to capture economic growth, using annual data from 1986 to 2016. The Augmented Dickey Fuller (ADF) and Phillip Perron (PP) tests reveals that apart from interest rate, all other variables were stationary at first difference. The Bounds test to cointegration confirms the existence of a longrun relationship amongst the variables considered for the study. The ARDL results suggests that in both long and short-run estimations that a rise in banking sector stability, financial depth and return on assets will lead to an increase in economic growth, conversely, an increase in interest rate will result to a fall in economic growth. Finally, we recommend that regulators improve both the micro-prudential and the macro-prudential supervision of the banking industry, while an upward review of the current minimum capital base has become imperative owing to the effect of inflation and fall in the country’s exchange rate.