Analysing the Transmission of Global Financial Stress to the Nigerian Banking System

Global financial stress episodes have historically transmitted adverse shocks to emerging market banking systems, and quantifying these transmission effects in the Nigerian context provides important evidence for macroprudential policy design. This study analyses the transmission of global financial stress to the Nigerian banking system using monthly data from 2007 to 2022. Global financial stress was measured by the Kansas City Financial Stress Index and the Chicago Board Options Exchange Volatility Index. Nigerian banking system conditions were measured by aggregate non-performing loan ratios, interbank market rates, bank stock price indices, and banking sector credit growth. Vector autoregression modelling, impulse response functions, and Diebold-Yilmaz spillover analysis were employed to assess transmission dynamics. Results showed that global financial stress shocks produced statistically significant tightening in Nigerian interbank market rates within two to three months, with the effect peaking at the fifth month. Bank stock prices declined by an average of 8.3% in response to a one standard deviation increase in the VIX within three months. Non-performing loan ratios increased significantly with a six-month lag following global stress episodes. The magnitude of transmission increased after 2015, consistent with Nigeria's greater financial openness. The study concludes that the Nigerian banking system has increasing sensitivity to global financial stress, and recommends early warning system integration of global financial stress indicators into the Central Bank of Nigeria's financial stability assessment framework.

Keywords: global financial stress, banking system, spillover transmission, VIX, Nigeria