Empirical Investigation of the Effect of Macroprudential Policy on Credit Cycles in Nigeria

Macroprudential policy instruments are designed to limit the procyclicality of credit and contain systemic financial risk, and their effectiveness in moderating credit cycles in Nigeria's bank-dominated financial system requires rigorous empirical examination. This study empirically investigates the effect of macroprudential policy instruments on credit cycles in Nigeria for the period 2010 to 2023. Secondary time-series data were sourced from the Central Bank of Nigeria Statistical Bulletin, covering the deployment of loan-to-deposit ratio requirements, the single obligor limit, the loan-to-value ratio for mortgage lending, and countercyclical capital buffer announcements. Credit cycles were identified using a Hodrick-Prescott filter decomposition of the credit-to-GDP ratio gap. Local projection methods were employed to estimate the dynamic effects of macroprudential policy tightening on credit growth at horizons of 1 to 12 quarters. Results showed that loan-to-deposit ratio tightening produced a statistically significant credit contraction of 2.3 percentage points at the four-quarter horizon (p < 0.05). Single obligor limit reductions had a delayed credit-dampening effect, becoming significant from the sixth quarter. Countercyclical capital buffer announcements had a faster market signalling effect, reducing credit growth expectations within two quarters. The study fills a gap in the Nigerian macroprudential effectiveness literature and concludes that loan-to-deposit ratio policy is the most immediately effective macroprudential tool for moderating credit cycles, while capital buffer policy has stronger expectation-management properties. Keywords: macroprudential policy, credit cycles, loan-to-deposit ratio, systemic risk, Nigeria