Nonlinear Effects of Bank Size on Capital Adequacy: Evidence from Nigerian Deposit Money Banks
Abstract
This study examines the nonlinear effects of bank size on the capital adequacy of Nigerian deposit money banks from 2008 to 2024. Panel Threshold Regression was used to determine whether a threshold relationship exists and to identify the critical level of bank size at which the effect on capital adequacy changes. In addition, the System Generalized Method of Moments (System GMM) estimator was adopted to account for the dynamic nature of capital adequacy and potential endogeneity among the independent variables. The threshold regression revealed a bank-size threshold of 18.80, separating the banks into two separate regimes. Below the threshold, bank size had a positive significant effect on capital adequacy, while above the threshold; the effect was positive but declined to a coefficient of 0.0088. This shows that although bank expansion contributes positively to capital adequacy, its marginal contribution declines as banks become larger. The System GMM results further showed that capital adequacy is highly persistent over time, with lagged capital adequacy ratio having a positive significant effect. The study concludes that bank size has a nonlinear effect on capital adequacy, with the positive effect of bank size declining as banks become larger. The study therefore recommends that Nigerian deposit money banks should pursue growth while maintaining adequate capital positions and effective risk management.
Keywords
Bank Size; Capital Adequacy; Panel Threshold Regression; System GMM; Deposit Money Banks; Nigeria.
References
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