Banks’ risk appetite, heterogeneity and monetary policy: evidence from Nigeria

Abstract

The study examines the effects of bank heterogeneity on risk appetite under changing monetary policy stance of the monetary authority. The scope of the study covers the period 2005 to 2015 using data obtained from the published accounts of the affected banks and Central Bank of Nigeria (CBN) statistical bulletin, various volumes. Using the AutoRegressive Distributed Lag (ARDL) approach, the study confirms that the risk appetite of commercial banks in Nigeria is significantly influenced by monetary policy variables and by bank-specific characteristics. Furthermore, the findings established the fact that domestic systemically important commercial banks in Nigeria tend to have lower appetite for risk than the unsystemic banks meaning that the bigger the banks, the safer the entire financial system in Nigeria. The study therefore recommends that the Federal Government of Nigeria, through the agency of the Central Bank, should continue to keenly monitor the entire banking system, but particularly the systemically important banks (SIBs) to avoid distress or crisis in the financial system. Again, the unsystemic banks that are seen to be performing poorly should be encouraged to either merge or be acquired to form mega banks which will eventually make the entire system stronger.

Keywords: Heterogeneity, risk appetite, monetary policy, monetary authority