Stanford Institute for Economic Policy Research
Journal of Economics and International Finance Vol. 2(11), pp.251-260 November 2010 Available online at http://www.academicjournals.org/JEIF ISSN 2006-9812 ©2010 Academic Journals
Full Length Research Paper
Exchange rate volatility, stock price fluctuations and the lending behaviour of banks in Nigeria
Mbutor O. Mbutor
Research Department, Central Bank of Nigeria. E-mail: mbukor@yahoo.co.uk.
Accepted September 9, 2010
Following the recent global economic crisis, so many macroeconomic maladjustments have unfolded in the Nigerian economy. First, the naira exchange rate depreciated sharply and became more volatile than any other time in nearly a decade; the stock market indices have dived very south relative to their previous year 's levels and banks, because of their exposure to foreign credit lines, the stock market by themselves and their loan customers- were feared to be on the brink of collapse. Consequently, the Central Bank of Nigeria went to no end of limits to provide liquidity for the banks with a view to forestalling the feared consequences of the crisis. The main concern of researchers and analysts has been to identify the nexus through which the international crisis passed through to the domestic economy. Was the depreciation in the naira exchange rate responsible for the stock market collapse? Or was the reverse the case? Did banks curtail lending because of the depreciation or the fluctuation in the stock indices? This study empirically answers these questions. The vector auto regression (VAR) methodology is applied, treating the data series for temporal properties unit roots and co integration. The impulse response function and the analysis of variance were used to filter the effects of the included variables on bank loans, while the Engel Granger causality confirmed the lines of causation among exchange rate volatility, equity prices and bank loans. Preliminary evidence show that exchange rate volatility and equity price fluctuations
Full Length Research Paper
Exchange rate volatility, stock price fluctuations and the lending behaviour of banks in Nigeria
Mbutor O. Mbutor
Research Department, Central Bank of Nigeria. E-mail: mbukor@yahoo.co.uk.
Accepted September 9, 2010
Following the recent global economic crisis, so many macroeconomic maladjustments have unfolded in the Nigerian economy. First, the naira exchange rate depreciated sharply and became more volatile than any other time in nearly a decade; the stock market indices have dived very south relative to their previous year 's levels and banks, because of their exposure to foreign credit lines, the stock market by themselves and their loan customers- were feared to be on the brink of collapse. Consequently, the Central Bank of Nigeria went to no end of limits to provide liquidity for the banks with a view to forestalling the feared consequences of the crisis. The main concern of researchers and analysts has been to identify the nexus through which the international crisis passed through to the domestic economy. Was the depreciation in the naira exchange rate responsible for the stock market collapse? Or was the reverse the case? Did banks curtail lending because of the depreciation or the fluctuation in the stock indices? This study empirically answers these questions. The vector auto regression (VAR) methodology is applied, treating the data series for temporal properties unit roots and co integration. The impulse response function and the analysis of variance were used to filter the effects of the included variables on bank loans, while the Engel Granger causality confirmed the lines of causation among exchange rate volatility, equity prices and bank loans. Preliminary evidence show that exchange rate volatility and equity price fluctuations
References: Baum CF, CaglayanM, Ozkhan N (2005). The Second Moment Matter; the Response of Bank Lending Behaviour to Macroeconomic Uncertainty, pp. 289-304. Bernanke BS, Gertler M (1987). Inside the Black Box: The Credit Channel of Monetary Policy Transmission, J. Econ. Perspect., 9(4): 22-48. Kim BS, Sun R, Ramon M. (1994). Stock Prices and Bank Lending Behaviour in Japan Federal Reserve Bank of SanFrancisco, Weekly Letter, pp. 06- 94. Nnanna OJ, Dogo M (1998). Structural Reforms, Monetary Policy and Financial Deepening. Nig. Experience. Econ. Fin. Rev., 36: 2. Nnnna OJ (2001). Bank Lending and Economic Growth: An Empirical Analysis with Implications for Monetary Formulation in Nigeria Central Bank of Nigeria, Econ. Fin. Rev., 40: 3. Olaf H, Lucas M, Chodechai S (2007). Financial Liberalization in Emerging Markets.How Does Bank Lending Change? Discussion, p. 365. Olaniyan O (2000). The Effects of Instability on Aggregate Investment in Nigeria. The Nigerian J. Soc. Econ. Stud., 42: 1. Sharpe SA (1995). Bank capitalization, regulation, and the credit crunch. A critical review of the research findings,Finance Economics Discussion Series, Board of Governors of the Federal Reserve System, p. 95/20 Somoye ROC, Ilo BM (2009). The impact of Microeconomic instability on the Banking sector lending Behaviourer in. J. Money, Invest. Banking.,7: 29-42. Stiglitz JE (2004). Capital Market Liberalization, Globalization and the IMF Oxford Rev. Econo. Policy, 20(1): 57-71. Talavera O, Tsapin A, Zholud O (2006). Macroeconomic Uncertainty and Bank Lending. The Case of Ukraine, GIER, Discussion, p. 637.