Monetary Policy Shocks and Health of the Banking Sector in Nigeria

Abstract

This study examines the reaction of banking sector health to the shocks of monetary policy in Nigeria using a monthly time series dataset from January 2010 to December 2021. In the estimate instruments of monetary policy such as monetary policy rate, open buyback, treasury bills, liquidity ratio and cash reserve ratio were used while banking sector health was measured as loan-to-asset-ratio and loan-to-deposit ratio. In addition, the impulse response function was used as the technique of analysis. The results of this study reveal that monetary policy rate and cash reserve ratio impulse adverse shocks to banking sector health measured as a loan-to-asset ratio, while open buyback, treasury bills, and liquidity ratios have caused a positive shock to banking sector health. Differently, from the loan-to-deposit ratio, this study shows that shocks to the monetary policy rate, open buyback, and cash reserve ratio have transmitted negative shocks to the health of the banking sector. In addition, shocks from treasury bills and liquidity ratios have led to a positive reaction from the side of banking sector health. To make the banking sector so strong, the central bank should reduce the monetary policy rate and cash reserve ratio, and increase treasury bills and liquidity ratio.