Capital Adequacy and Risk-Taking Behaviour of Banks in Nigeria

This study investigates the relationship between capital adequacy and risk-taking behaviour of commercial banks in Nigeria over the period 1986–2025, incorporating five macroeconomic control variables: broad money supply (M2) growth, monetary policy rate (MPR), foreign reserves, Central Bank of Nigeria (CBN) inflation rate, and output gap. The study is motivated by persistent regulatory concerns about whether minimum capital requirements discipline bank risk-taking or, paradoxically, incentivise excessive risk exposure, particularly in an emerging economy characterised by structural fragility, regulatory opacity, and volatile macroeconomic conditions. Drawing on the regulatory buffer theory, the charter value hypothesis, and the too-big-to-fail moral hazard framework, the paper develops a dynamic panel-inspired time series regression framework using annual aggregate banking sector data sourced from the CBN Statistical Bulletin, the World Bank World Development Indicators, and the Nigeria Deposit Insurance Corporation (NDIC) Annual Reports. The empirical analysis employs the Autoregressive Distributed Lag (ARDL) bounds testing approach, supported by robust post-estimation diagnostics including serial correlation tests, heteroscedasticity tests, normality checks, and structural stability assessments. Results indicate that the capital adequacy ratio (CAR) exerts a statistically significant and negative effect on the non-performing loans ratio (NPLR) in the long run, suggesting that better-capitalised Nigerian banks tend to adopt more conservative risk postures. However, in the short run, capital requirements exhibit a non-linear and occasionally risk-amplifying effect, consistent with regulatory arbitrage behaviour. M2 growth and output gap positively drive bank risk-taking, while the monetary policy rate and foreign reserves exhibit risk-dampening effects. Inflation, proxied by the CBN headline rate, demonstrates a complex dual effect depending on the time horizon. These findings carry profound implications for the Central Bank of Nigeria's recapitalisation policy, macroprudential regulation, and the broader financial stability architecture in Nigeria and comparable Sub-Saharan African economies. The study contributes to the thin empirical literature on macroeconomic-moderated capital-risk relationships in frontier markets.