Does Bank Capitalization Lead to High Liquidity Creation? – Evidence from Nigerian Banking Sector Using Panel Least Square Method

The study critically examines the impact of capitalization on bank liquidity creation in selected banks of Nigeria using the annual data of 10 banks for the period 2006 to 2010. The results of Levin, Lin and Chu unit root test show that all the variables are non-stationary at level. The results of Panel Least Square (PLS) regression reveal that bank size and capital asset ratio are positively related to bank capital but only bank size is significantly related to bank capital. In addition, the results show that bank liquidity and non-performing/assets ratio have a non-significant negative effect on bank capital. The implication is that better capitalized banks tend to create less liquidity, which supports the ‘financial fragility-crowding out’ hypothesis. This finding has important policy implications for emerging countries like Nigeria as it suggests that bank capital requirements, that is, recapitalization policy, implemented to support financial stability, may harm liquidity creation. The financial regulatory body needs to provide appropriate effective measures to adequately enhance transparent accountability. Measures such as relaxation or elimination of restrictions on profits and capital remittances, opening of formerly ‘priority’ sectors to investors, and provision of adequate security, among others, should be put in place.