Indicators of Market Discipline in Nigerian Commercial Banks

The introduction of bank deposit insurance schemes provides a financial safety net for depositors and the financial system as a whole. This may however, induce bank management to take on an excessive risk appetite thus creating a moral hazard problem that may lead to reduced market discipline following deposit insurance implementation. This study investigates indicators of market discipline in Nigerian commercial banks with a set of bank-specific and macroeconomic variables using the generalised least squares regression technique to analyse data obtained from 15 selected banks over the period 2009 to 2020. Results from the study show that bank-specific variables (credit quality, liquidity, size and earnings) and macroeconomic variable (gross domestic product) indicate mechanisms through which market discipline is exerted in Nigerian commercial banks. The findings provide support for the economic theory of deposit insurance.