Credit Risk, Macroeconomic Conditions, and Bank Stability in Nigeria: A Dynamic Panel Analysis

This study empirically investigates the joint influence of credit risk and macroeconomic conditions on the stability of deposit money banks in Nigeria, addressing a research gap in the literature that has largely treated these two categories of determinants separately. Bank stability is operationalised using the Z-score measure, which combines return on assets, equity-to-asset ratio, and return volatility to produce a single index of insolvency distance. Credit risk is captured by non-performing loan ratios and loan loss provisions, while macroeconomic conditions are represented by real gross domestic product growth, inflation rate, monetary policy rate, and the exchange rate. Secondary data spanning 2012 to 2022 are extracted from the financial statements of fourteen listed deposit money banks and the Central Bank of Nigeria Statistical Bulletin. The study employs a dynamic panel regression estimated using the system generalised method of moments estimator to address endogeneity and capture persistence in stability outcomes. The theoretical framework integrates the financial fragility hypothesis, the procyclicality of bank lending literature, and the asset quality-profitability transmission channel. The study disaggregates findings by bank size classification to assess whether large versus small banks demonstrate differential sensitivity to credit risk and macroeconomic shocks. A key innovation of this research is the construction of an interaction term between credit risk and the monetary policy rate cycle to test whether tightening monetary conditions amplify credit default risks. Findings are expected to contribute to the Central Bank of Nigeria's macro-prudential supervision framework and to the academic literature on bank stability in frontier markets. Keywords: credit risk, bank stability, macroeconomic conditions, dynamic panel, Nigeria