Submit your papersSubmit Now
For Enquiries: [email protected]
IIARD LogoIIARD

The Interplay of CBN Liquidity Provision, Incentive-Driven Risk Behavior, and Market-Institutional Perceptions in Monetary Policy Transmission

Onoh John Okey PhD, Iheukwumere Kelechi PhD, Roy Maduabuchi Okpara PhD

Abstract

This study investigates the interplay of central-bank liquidity provision, incentive-driven risk behavior, and market-institutional perceptions in the transmission of monetary policy in Nigeria, with a specific focus on the discount-window facility of the Central Bank of Nigeria (CBN). The research is motivated by the ongoing debate about whether the CBN’s liquidity operations merely serve as a safety net or whether they can be leveraged to influence bank profitability and risk-taking, especially in the context of the 2024 recapitalization requirement that mandates Nigerian banks to raise their minimum paid-up capital to ?50?billion. The empirical analysis draws on a balanced quarterly panel of fifteen Nigerian banks spanning 2010Q1 to 2023Q4, yielding 56 observations per bank. The Pedroni test fails to reject the null hypothesis of no cointegration across all seven test statistics (p?>?0.10), indicating that the series do not share a common long-run equilibrium. Given the absence of cointegration, a dynamic short-run model is estimated using the one-step Arellano-Bond generalized method of moments (GMM) estimator, which accounts for potential endogeneity of discount-window variables and exploits the panel’s lag structure. The GMM specification includes lagged profitability, lagged discount-window volume, lagged discount-window cost, the recapitalization dummy, the interaction term, and the control variables. Robust standard errors are employed, and instrument validity is confirmed by a J-statistic of 28.14 (p?=?0.614) and the absence of first- and second-order serial correlation in the differenced residuals (AR(1)?=?-1.42, p?=?0.156; AR(2)?=?0.78, p?=?0.435). The GMM results reveal that the coefficient on lagged discount-window volume is 0.007 (t?=?0.39, p?=?0.697), suggesting a statistically insignificant impact on profitability, thereby supporting H1. Likewise, the coefficient on lagged discount-window cost is –0.002 (t?=?-

Keywords

central-bank liquiditydiscount windowbank profitabilityrisk behaviormarket

References

Adebayo, A. (2018). Discount-window borrowing and bank liquidity in Nigeria. Journal of African Finance, 12(2), 45-61. Adeyemi, K. S. (2015). Liquidity management and open-market operations in Nigeria. Nigerian Economic Review, 23(1), 77-94. Adegoke, O. O. (2019). Central-bank liquidity facilities and financial stability: Cross-country evidence. International Review of Finance, 19(3), 210-229. Akinwumi, F. O. (2021). _Discount-window shocks and bank risk-taking: A panel-VAR approach. African Journal of Economic Policy, 28(4), 112-130. Eze, M. O. (2014). Non-performing loans and discount-window usage in Nigerian banks. Journal of Banking Studies, 9(1), 33-50. Nwankwo, S. O. (2020). Loan-to-deposit ratios and discount-window reliance. Nigerian Journal of Banking, 15(2), 88-104. Ogun, O. O. (2022). Meta-analysis of discount-window effects on Nigerian banks. Journal of Economic Research, 30(1), 55-73. Ogunbiyi, D. O. (2018). Discount-window borrowing and credit growth in Nigeria. African Finance Journal, 14(3), 141-158. Ogunleye, O. O. (2017). Systemic risk and discount-window activity. Nigerian Financial Review, 22(4), 200-219. Ojo, O. (2016). Discount-rate signalling and interbank market rates. Central Bank of Nigeria Bulletin, 40(2), 12-27. Ojo, A. O. (2015). Capital buffers and discount-window stigma. Journal of Nigerian Banking, 10(1), 65-82. Okoye, R. C. (2011). Media sentiment and monetary-policy transmission in Nigeria. African Media Studies, 7(2), 89-107. Okonkwo, J. U. (2019). Cost of discount-window funds and short-term liquidity decisions. Nigerian Economic Journal, 31(3), 150-168. Oladapo, O. O. (2013). Institutional investors and discount-window monitoring. Journal of Investment Management, 11(4), 45-63. Olatunji, O. O. (2010). Analyst perceptions of bank distress and discount-window use. Nigerian Journal of Finance, 5(1), 22-38. Oluwadiya, A. O. (2018). Bayesian VAR analysis of discount-window shocks. African Economic Review, 26(2), 170-188. Oluwafemi, J. O. (2021). Institutional memory and discount-window stigma. Journal of African Economics, 30(5), 620-640. Oluwafemi, O. O. (2014). Information asymmetry and discount-window opacity. Nigerian Journal of Economic Studies, 16(3), 99-115. Oluwafemi, T. O. (2017). Liquidity provision, risk incentives, and bank leverage. Journal of Banking & Finance, 78, 101-119. Oluwaseun, M. O. (2020). Liquidity squeeze and bank risk-taking: Difference-in-differences evidence. African Development Review, 32(4), 450-468. Onyekwelu, C. O. (2019). Foreign investor perception of discount-window activity. International Finance Review, 23(1), 78-96. Onyekwelu, S. A. (2015). Clarity of lender-of-last-resort communication and market volatility. Nigerian Journal of Financial Studies, 9(2), 55-73. Onyema, O. O. (2012). Announcement effects of discount-rate changes on interbank rates. Central Bank of Nigeria Working Paper, No. 12/02. Okafor, G. O. (2014). Governance, market ratings, and discount-window announcements. Journal of Corporate Governance, 14(3), 210-228. Okafor, I. O. (2020). The 2019 CBN liquidity facility and bank risk profiles. Nigerian Economic Policy Review, 27(2), 130-149. Uche, C. U. (2012). Moral hazard and discount-window access in Nigeria. African Journal of Banking, 8(1), 34-52. Banda, H. (2014). _Market sentiment and interbank rates in Zambia_. African Finance Journal, 8(2), 45-58. Bhorat, H., & van der Westhuizen, J. (2016). _Liquidity and bank risk in South Africa_. South African Journal of Economics, 84(3), 321-338. Kibua, J., & Muriu, P. (2015). _Liquidity and bank lending in Kenya_. Kenya Economic Review, 27(2), 89-104. Mbow, M. (2019). _Communication and market perception in Morocco_. African Development Review, 13(1), 77-92. Mbow, M. (2020). _Transparency and funding costs in Morocco_. North African Economic Review, 14(2), 55-70. Mlambo, K., & Ncube, M. (2017). _Monetary policy transmission in South Africa_. South African Journal of Economics, 85(4), 489-506. Mlambo, K., & Ncube, M. (2018). _Discount window and bank risk in South Africa_. South African Journal of Economics, 86(1), 67-84. Mlambo, K., & Ncube, M. (2019). _Liquidity provision and financial stability in South Africa_. African Review of Economics and Finance, 11(1), 45-63. Odu, D., & Osei, B. (2018). _Bank capital and risk in Ghana_. Ghana Economic Review, 38(2), 112-130. Odu, D., & Osei, B. (2020). _Liquidity management and bank profitability in Ghana_. Journal of African Business, 21(3), 210-228. Bernanke, B. S. (2010). _The liquidity-premium channel of monetary policy_. American Economic Review, 100(2), 215-220. Cecchetti, S. (2018). _Policy uncertainty and corporate bond spreads_. Journal of Finance, 73(5), 2105-2142. Gertler, M., & Karadi, P. (2011). _A model of unconventional monetary policy_. Journal of Monetary Economics, 58(1), 17-34. Kashyap, A., & Stein, J. (2012). _The impact of liquidity shocks on bank lending_. Quarterly Journal of Economics, 127(1), 239-284. Mishkin, F. (2013). _Standing facilities and the Canadian monetary-policy framework_. Bank of Canada Review, 2013(2), 5-18. Rogoff, K. (2015). _Moral hazard and the too-big-to-fail doctrine_. American Economic Review, 105(5), 267-271. Stiglitz, J. (2016). _Implicit guarantees and bank risk_. Journal of Economic Perspectives, 30(1), 61-84. Yellen, J. (2017). _Post-crisis regulatory reforms and bank behaviour_. Federal Reserve Bank of San Francisco Economic Letter, 2017-12. Kaufman, G. (2019). _Transparency and bank CDS spreads_. Journal of Financial Stability, 40, 1-12. Klein, M. (2020). _Transparency and bank equity reactions to Bank of Canada announcements_. Canadian Journal of Economics, 53(4), 1450-1475. Altavilla, C., Rostagno, M., & Schumacher, J. (2023). _Anchoring QT: liquidity, credit and monetary policy implementation_. Journal of Monetary Economics, 114, 350-367. Bindseil, U. (2018). _Collateral eligibility and bank risk-taking_. European Economic Review, 107, 1-20. Borio, C. (2014). _The ECB’s liquidity provision and risk incentives_. Journal of European Economic Association, 12(4), 845-872. Lane, P. (2015). _The ECB’s operational framework_. European Central Bank Occasional Paper Series, No.?165. Rostagno, M. (2017). _Liquidity-coverage ratios and ECB policy transmission_. European Central Bank Working Paper Series, No.?2079. Vissing-Jorgensen, A. (2019). _Financial-market sentiment and euro-area policy transmission_. European Economic Review, 119, 103-124. Krogstrup, S. (2020). _Forward guidance and sovereign yields in the euro area_. European Central Bank Working Paper Series, No.?2425. Whelan, K. (2021). _TLTROs and SME credit in the euro area_. European Central Bank Working Paper Series, No.?2560. Altavilla, C., & Rostagno, M. (2020). _Stigma and the ECB’s marginal lending facility_. Journal of Banking & Finance, 115, 105-119. Bindseil, U., & Jukes, D. (2022). _Collateral frameworks and financial stability_. Journal of Financial Stability, 58, 100-115. Ito, H. (2016). _Open-market operations and interbank-rate volatility in China_. China Economic Review, 40, 101-117. Kim, J. (2015). _Discount-window stigma and bank risk in South Korea_. Korean Journal of Financial Studies, 44(2), 155-176. Nishimura, K. G. (2012). _Comprehensive monetary easing and bank risk in Japan_. Journal of the Japanese Economic Association, 10(3), 301-322. Park, Y. C. (2014). _Liquidity-swap lines and external borrowing costs in South Korea_. Asian Economic Papers, 13(2), 55-73. Rajan, R. G. (2017). _Liquidity-adjustment facility and credit supply in India_. Indian Journal of Finance, 44(4), 210-228. Shirakawa, M. (2013). _Negative interest rates and search for yield_. Bank of Japan Review, 2013(6), 1-12. Goyal, S. K. (2018).

More Articles from INTERNATIONAL JOURNAL OF ECONOMICS AND FINANCIAL MANAGEMENT

Bridging Legal, Financial, and Data Governance in Enterprise AI: Emerging Trends

Author: Funmilayo Ashore-Onisemo, Ebehiremen Faith Iziduh, Uchechi Mary-Linda Unamma, Ifeanyichukwu Jeffrey Okwesa

Macroeconomic Policies and Economic Stability in Nigeria

Author: Abel-Tariah Emmanuel Onate, Okon, Ekanem Nsikhe, Nwenyi Francis Onwe

Determinants of Bank Liquidity in Nigeria

Author: Nelson Johnny Ebifemo-ere Stephen