Macroprudential Policy Effectiveness, Bank Behaviour, and Credit Cycles in Nigeria

Macroprudential policy tools, designed to limit the build-up of systemic financial risk through countercyclical capital buffers, loan-to-value limits, leverage restrictions, and sectoral exposure caps, have moved from theoretical construct to active policy practice following the global financial crisis, yet evidence of their effectiveness in African banking systems remains limited. This study develops a theoretical framework for evaluating macroprudential policy effectiveness in the context of a frontier market banking system and estimates the behavioural and credit cycle effects of macroprudential interventions in Nigeria. The theoretical contribution is a dynamic banking model with endogenous credit cycles in which a macroprudential regulator sets policy instruments under incomplete information about the state of the financial cycle and strategic complementarities among banks create amplification and dampening effects depending on policy design. The model derives optimal macroprudential policy rules and generates predictions about bank balance sheet responses that are testable with supervisory and market data. The empirical application uses a confidential supervisory dataset from the Central Bank of Nigeria combining bank-level balance sheet data, regulatory action records, and macroprudential policy implementation events for the period 2012 to 2023. Event study methodology, difference-in-differences with heterogeneous treatment, and a local projection framework are applied to estimate the causal effects of macroprudential interventions on credit growth, risk-taking, and systemic risk indicators. The study also evaluates the interplay between macroprudential and monetary policy in Nigeria, examining whether the two policy frameworks reinforce or counteract each other. The theoretical framework integrates macroprudential theory, the leaning-against-the-wind policy debate, and the credit cycle literature. The PhD-level contribution lies in the original theoretical model, the use of supervisory data, and the multi-method causal identification framework. Findings are directly intended for the Central Bank of Nigeria's Financial Policy and Regulation Department and for the academic literature on macroprudential policy in developing economies. Keywords: macroprudential policy, bank behaviour, credit cycles, Nigeria, systemic risk