Response of Deposit Money Banks to Monetary Policy Dynamics in Nigeria

Abstract

This study examined how banks react to the monetary policies transmission mechanisms of the central bank of Nigeria. The data employed were collected from Nigerian Deposit Insurance Cooperation and Central Bank of Nigeria and subjected to various finametric techniques. The major findings are that cash reserve ratio negatively and significantly affects the performance of deposit money banks in Nigeria, while other monetary policy variables exert insignificantly to the performance of deposit money banks. It was also found that apart from banks own shock; banks respond negatively to shocks from major monetary policy instruments. It was observed that Monetary Policy Rate causes bank performance in both in the short run and long run. While, Cash Reserve Ratio, Liquidity Ratio and Saving Deposit Rate do not cause bank performance in the short run but in the long run. It was also found that monetary policy instruments jointly cause bank performance in the short and long run as opposed by individual instruments in Nigeria. The researchers therefore suggest among others that central bank of Nigeria reduce the cash reserve ratio to enable deposit money banks extend more loans to their potential customers, thereby enhance performance.