Measuring the Connectedness of the Nigerian Banking System
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Date
2026
Authors
Victor A. Malaolu
Jonathan E. Ogbuabor
Prof. Hyacinth Ichoku
Journal Title
Journal ISSN
Volume Title
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