Abstract The persistence of banking sector vulnerabilities in emerging economies has renewed scholarly and policy interest in the effectiveness of capital adequacy regulation as a tool for safeguarding financial stability. In Nigeria, recurrent episodes of banking distress and regulatory reforms underscore the need for empirical evidence on whether capital buffers meaningfully enhance systemic resilience. This study investigates the impact of capital adequacy regulation on financial stability in Nigeria over the period 2008-2023. Financial stability is proxied by a composite banking stability index that captures solvency, asset quality, and systemic risk conditions, while capital adequacy is measured using the regulatory capital ratio in line with Basel and Central Bank of Nigeria (CBN) standards. Employing descriptive analysis and multivariate regression techniques, the study controls for liquidity conditions and asset quality to isolate the effect of capital adequacy on stability. The empirical findings reveal that capital adequacy has a positive and statistically significant effect on financial stability, indicating that higher capital buffers enhance the banking system's ability to absorb shocks and mitigate systemic risk. Liquidity conditions are found to complement capital adequacy in promoting stability, while non-performing loans exert a significant destabilizing effect. The results are robust across diagnostic tests and align with buffer theory and financial fragility theory, which emphasize the stabilizing role of strong capitalization. The study contributes to the literature by providing Nigeria-specific empirical evidence using a composite stability index rather than single indicators. From a policy perspective, the findings underscore the importance of sustained enforcement of capital adequacy regulations, the adoption of countercyclical capital buffers, and strengthened supervision of asset quality. The study concludes that capital adequacy regulation remains a critical pillar of financial stability in Nigeria, but its effectiveness depends on complementary prudential measures.
Osondu-Ekekwe et al. (Thu,) studied this question.