CAMEL Analysis, Prudential Regulation and Banking System Soundness in Nigeria

This paper examines select financial indicators and their prudential implications for banking system soundness in Nigeria. For each of the hypothesized functional relationships, the Spearman’s rank correlation coefficient (r`) and the corresponding Freund-Williams significance test at the 5% level were calculated. Under regimes of rising proportion of non-performing loans in the distressed banks, increasing bank liquidity and falling profitability, the paper found the selected capital adequacy ratios to be significantly correlated with bank solvency. The cash reserve ratio correlates negatively and significantly with the proportion of non-performing loans (npls). It was also found that the cash and bank balances ratio correlates positively and significantly with the return on total assets. While the ratio of loans-to-deposits correlates negatively and significantly with bank solvency, the pre-tax profit margin correlates positively with bank solvency. Incremental capital requirements should be graduated in line with selected bank solvency and profitability projections. An optimal loan-to-deposit ratio must have the objectives of increasing asset quality, long-run corporate growth, and facilitation of the monetary transmission mechanism.