BASEL III LIQUIDITY REQUIREMENTS AND BANK PROFITABILITY: EVIDENCE FROM NIGERIA

Abstract

This paper examines the impact of Basel III liquidity requirements, specifically the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), on the profitability of banks in Nigeria, using regression discontinuity design (RDD) to analyze data from 14 banks over the period from 2009 to 2020. The study provides empirical insights into how these regulations influence bank performance, focusing on return on assets (ROA) and return on equity (ROE). The results reveal that the LCR has a significant positive impact on ROA, indicating that holding adequate high-quality liquid assets improves asset efficiency. However, its effect on ROE is insignificant, suggesting that enhanced liquidity does not necessarily translate into higher returns for shareholders. Similarly, the NSFR shows a significant positive impact on ROA but an insignificant effect on ROE, highlighting the benefits of long-term funding stability for asset profitability without significantly boosting shareholder returns. These findings suggest that while Basel III liquidity requirements contribute to enhancing bank stability and operational performance, they may not immediately result in higher equity returns in the Nigerian context. The study recommends that banks optimize their capital allocation and liquidity management strategies to achieve a balance between regulatory compliance and shareholder value. Additionally, regulators, particularly the Central Bank of Nigeria (CBN), should periodically review liquidity requirements to reflect the unique challenges of the Nigerian banking environment. This study contributes to the existing literature by providing empirical evidence on the impact of Basel III liquidity requirements on bank profitability in the Nigerian context. The use of Regression Discontinuity Design offers a robust approach to identifying causal effects, enriching the understanding of how liquidity management practices affect financial performance, particularly in emerging markets where liquidity risks are more pronounced.