The recent arbitrary increase of bank minimum capital base from the current N2 billion to N25 billion with effect from December, 2005, has raised the question of whether or not capital adequacy requirement affects bank asset quality, and hence limit risk concentrations in the banking industry. The theoretical and empirical evidence provides mixed results. In spite of the various contentions based on the grounds of moral hazards and the standard prudential paternalistic models, Dowd (1999) argues that there is nothing wrong with laissez faire banking that capital adequacy regulation will put right. From the empirical data of 23 Nigerian banks, we show that well-capitalized banks reveal poor asset quality characteristics, while undercapitalized banks display better asset quality in their loan portfolios. The computed correlation coefficients show negative linear relationships between capital adequacy and asset quality. The rank correlation measures fall within the region of± 0.42 at the 5 percent of significance to necessitate accepting the null hypothesis of no significant association between capital adequacy and bank asset quality. What is rather needed is a collective action to facilitate loan repayment behavior, inculcate sound lending practices, and provide an appropriate policy environment for improving per capita income and savings.
Capital ratios, Asset quality, Bank lending, Risk concentration, Monetary polic