ABSTRACT
The main thrust of Basel II framework is to ensure that banks maintain adequate liquidity and higher capital buffers that will match their operations in the course of financial intermediation. In spite of this thrust, unanimity does not exist among bankers, financial regulators, scholars and researchers on the ability of Basel II to prevent future banking crisis and the effects it may have on the profitability of banks. While the protagonists lauded it to be a remarkable financial reform, the critics rebutted it to be a formidable regulatory reform that will affect the financial performance of banks adversely.
In view of this divergence, this study examined the impact of Basel II on financial performance of deposit money banks (DMBs) in Nigeria. Secondary data were collected over a period of 5 years from the annual reports and accounts of 8 sampled DMBs. A correlational research design was adopted while a parametric analytic technique of the OLS multiple regressions with panel data methodology was used to analyze the data. The results of the study, using STATA 10 as a statistical tool, revealed that capital adequacy ratio (CAR) strongly and negatively influences returns on assets (ROA) of the DMBs under study at 5% level of significance with a t-value of -2.32.
On the other hand, the study found that the liquidity coverage ratio (LCR) has strong and positive impact on the ROA of the DMBs at 1% level of significance with a t-value of 3.91while the asset quality ratio(AQR) used as a variable notation for the credit risk has no significant impact on the ROA of the sampled DMBs as its p-value of 0.198 is not statistically significant at 10%. Based on these findings, the study recommended that the financial regulators should continue to enforce capital adequacy ratio on banks even if it squeezes their financial performance.
This is because the standard can restrain obnoxious risk-taking on the part of banks and help promote banking sector stability and resilience to shocks. Also, due to the fact that the LCR has positive and significant impact on the financial performance of the sampled DMBs in Nigeria, the study recommended that the improvement and maintenance of proper LCR by the financial regulators and the banks' management in Nigeria can give rise to improvement in financial performance of the DMBs in Nigeria
