REGULATORY SHOCKS AND SHAREHOLDERS’ RETURNS IN FINANCIAL INSTITUTIONS

ABSTRACT

The 2009 crisis in the Nigerian banking system prompted a more robust and rigorous regulatory regime, with particular attention on enhancing the quality of banks and establishing financial stability. To this end, the regulator of banks in Nigeria implemented policies and pronouncements in line with economic realities and global events. In recent years, the performance of most banks has dwindled and the bank managers’ main excuse for poor performance has been regulatory headwinds. There is no consensus on the impact of regulatory shocks – Capital Adequacy Ratio, Liquidity Ratio and Cash Reserve Requirement – on bank performance (profitability and shareholders value). The research by earlier authors is inconclusive on the nature of relationship between regulatory shocks and performance. This study looks to re-evaluate the relationship between these variables and to understand/ explore strategy development for managing regulatory shocks in Nigerian commercial banks. My main findings can be summarized as follows: In view of the significant level of power and influence of the regulator of commercial banks in Nigeria, bank managers place as much high priority on regulatory compliance as on profitability and shareholders’ value creation. There is no evidence that changes/ fluctuation in profitability and shareholders value is significantly influenced by regulatory shocks – Capital Adequacy Ratio, Liquidity Ratio and Cash Reserve Requirement. Bank managers need to use strategic initiatives, as well as improved and flexible business model as tools for managing regulatory shocks and balancing shareholders’ and regulators’ expectations.

INTRODUCTION

There is the general notion that regulatory shocks significantly impact the ability of managers of financial institutions to generate adequate returns for their shareholders.The managers of financial institutions in Nigeria also share this sentiment as evident by the constant reference to regulatory headwinds as a reason for poor or dwindling performance. In recent years, the number of manager

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