Measuring the Connectedness of the Nigerian Banking System

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Date
2026
Authors
Victor A. Malaolu
Jonathan E. Ogbuabor
Prof. Hyacinth Ichoku
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Publisher
AERC
Abstract
The Global Financial Crisis showed that crises can quickly spread from one banking institution to others, thereby reigniting the interest of bank regulators in the connectedness of banking systems. In this study, we used the spillover approach of Diebold and Yilmaz (2009) to examine the connectedness of the Nigerian banking system. We find that the banking system in Nigeria is deeply interconnected with a mean total connectedness index of 76.13%, suggesting that there is a high likelihood that crises can spread from one institution to another. We also find that while the tier-1 banks exert dominant influence on the Nigerian banking system and therefore have the potential to propagate systemic risks, a few tier-2 banks are vulnerable to systemic risks arising from the connectedness of banks in Nigeria. These findings suggest that there is a need for the CBN to focus its regulatory oversight more on these banks, thereby highlighting the fact that in managing systemic risk in a banking system, the monetary authority can use connectedness analysis to focus on certain banks more than others. Our findings further indicate that the 2016 economic recession amplified the risk of the systemic banking crisis in Nigeria, suggesting that banking systems should be rigorously monitored during crisis periods to limit systemic risk. Lastly, our findings indicate that two of the banks taken over by the CBN in August 2009 were not vulnerable at the point of take-over, suggesting that connectedness analysis can be used to improve regulatory decision-making in such situations. The study concludes that the CBN can strengthen its regulatory oversight by extending its systemic risk management framework to include connectedness analysis
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