Stress Testing in the Nigerian Banking Sector

This paper examined stress testing in the Nigerian banking sector from 2004-2014 using error correction mechanism (ECM) and Ordinary Least Square (OLS) methodologies. The study adopted the bottom-up approach to stress management. Evidence from the analysis showed that stress testing is important to building a strong and viable financial system in the country. Bank’s going concern depends on profitability, solvency and liquidity whereas banks performance index depends on the behaviours of macroeconomic variables. The study found that Nigerian banking system is susceptible to various risks both within and outside the country. They are also exposed to macroeconomic risks as their performance index is based on these variables. The study concluded that how banks respond to risks determines the going concern and the viability of the nation’s financial system. Thus, a thorough credit risk management framework championed by the major stakeholders involved in the credit disbursement was recommended