Systemic Risk Measurement and Macroprudential Policy Design in Nigeria’s Banking System: An Original Contribution

Systemic risk in banking systems arises from interconnectedness, common exposures, and pro-cyclicality, and developing rigorous measurement frameworks applicable to Nigeria's concentrated banking market requires original methodological and theoretical contributions. This study develops an original systemic risk measurement framework for the Nigerian banking system, combining balance sheet interlinkage analysis, market-based systemic risk measures, and network theory to produce a composite systemic risk index tailored to the structural features of the Nigerian interbank market. The CoVaR approach, the Marginal Expected Shortfall, and the DistressedNetworks model were adapted and calibrated using quarterly balance sheet data from fifteen deposit money banks for the period 2010 to 2022, supplemented by interbank exposure data obtained from the Central Bank of Nigeria payment system records under a structured data access agreement. An original Nigerian Systemic Risk Composite Index is proposed, incorporating bank-level, network, and macro-financial dimensions. Empirical results show that the index successfully predicted the 2016 banking sector stress episode with a 6-month lead time, validating its early warning properties. Network centrality emerged as the strongest individual component predictor of system-wide stress episodes. The study makes original contributions by developing the first composite systemic risk index calibrated for the Nigerian banking architecture, theorising the relationship between network topology and systemic fragility in a concentrated emerging market banking system, and proposing a macroprudential policy response function linked to index thresholds. Policy recommendations for the Central Bank of Nigeria's macroprudential surveillance framework are provided.

Keywords: systemic risk, macroprudential policy, banking system, network analysis, Nigeria