Effect of Capital Adequacy on the Stability of Deposit Money Banks in North East Nigeria

Capital adequacy is a fundamental prudential requirement for banking stability, and its role in insulating deposit money banks against financial distress is particularly important in North East Nigeria, a region that has experienced economic disruptions from security challenges. This study examines the effect of capital adequacy on the financial stability of deposit money banks operating in Borno, Yobe, and Adamawa States. A longitudinal research design was adopted using secondary data extracted from the annual reports of six deposit money banks with significant branch networks in the North East zone for the period 2014 to 2022. Capital adequacy was measured using the capital adequacy ratio as defined by the Basel III framework, while financial stability was proxied by the Z-score, non-performing loan ratio, and liquidity ratio. Panel data fixed effects regression analysis was employed. Results demonstrated a significant positive relationship between the capital adequacy ratio and the Z-score measure of stability (coefficient = 0.34, p < 0.01). Capital adequacy was also negatively and significantly related to the non-performing loan ratio (coefficient = -0.28, p < 0.05). Security-related branch closures in Borno State moderated the capital adequacy-stability relationship, with the moderating effect statistically significant at the 10% level. The study concludes that maintaining adequate capital buffers is essential for sustaining bank stability in conflict-affected regions and recommends region-specific capital buffer guidance from the Central Bank of Nigeria. Keywords: capital adequacy, bank stability, deposit money banks, North East Nigeria, Basel III