ABSTRACT

This paper aims to assess the effect of bank capital adequacy requirements on bank capital and risk level, and on general bank performance. Capital adequacy requirements have been changing over the years, both at the national and international level and. The study attempt to find out the impact of Capital adequacy requirement on the money deposit banks in Nigeria. The study used Union Bank of Nigeria Plc as a case study. Union bank is one of the oldest, strongest and well- capitalized banks in Nigeria. Data relating to capital and assets are collected from the bank for a fifteen-year period. Simultaneous equation model is used to capture the relationship between bank portfolio risk and risk- based capital standards and tracks the dynamic adjustments in bank capital standards. The model is estimated and tested using the least square procedure. The findings show that the performance of a bank, proxied by the return on asset and size of the bank, determine the capital level of the bank. Secondly, a negative change in the level of bank capital leads to a positive change in the level of risk. Thirdly, regulatory pressure on capital adequacy level, does not affect the bank decision on capital or risk level. This result however is peculiar to strong banks. The result may be different for small or weak bank. Based on the result obtained, it is recommended that capital adequacy requirement should be carefully enforced to avoid negative macro economic effect such as capital crunch especially in emerging economics. Also bank should explore ways of enhancing their capital and risk portfolio management to ensure that their capital level does not fall below their risk level. Finally, bank should build up their asset base, as larger banks are better able to maintain adequate capital level.