CAPITAL ADEQUACY AND OPERATING EFFICIENCY OF NIGERIAN DEPOSIT BANKS: EVIDENCE FROM PANEL DATA

Capital adequacy in commercial banks is vital for meeting liquidity needs, ensuring profitability, protecting depositors’ funds, and maintaining public confidence. This study examines the impact of capital adequacy on the operational efficiency of banks in Nigeriafrom 2014-2024. There is scarcity of empirical studies that decomposed capital adequacy into equity capital, capital adequacy ratio, leverage ratio as well as total assets and rigorously investigate their distinct impacts on return on assets.  A historical research design was used, drawing on annual bank reports and the Central Bank of Nigeria (CBN) Statistical Bulletin. Fifteen DMBs were used as sample.  The Panel EGLS (Estimated Generalized Least Squares) with fixed effects and cross-sectional effects was used to examine the relationship between capital adequacy and bank efficiency. The results showed that capital adequacyhad asignificant negative impact on operating efficiency: a 1% increase in capital adequacy resulted 1.14%increase in operating efficiency (p-value = 0.00). The study also found a negative significant relationship between equity capital and return on equity. However, a positive significant relationship was found between total assets and return on equity. Finally, the results indicated a positive significant relationship between the capital adequacy ratio and return on assets, but a negative significant relationship between the leverage ratio and return on equity. The study recommended, among others, that the minimum capital requirement should continue to be reviewed and monitored to ensure banks remain liquid and profitable.  The study confirmed that the total assets, equity capital, capital adequacy ratio, and leverage ratio are key drivers of capital adequacy of deposit money banks.