MONETARY POLICY, BANK SIZE, AND CAPITAL ADEQUACY: A CONCEPTUAL FRAMEWORK FOR FINANCIAL STABILITY IN NIGERIA

Abstract

This paper examines the intricate relationship among monetary policy, bank size, and capital adequacy, using Nigeria as a focal context for understanding how macroeconomic policy instruments influence financial stability in emerging economies. The study is motivated by persistent structural and regulatory challenges within Nigeria's banking system and the need to re-evaluate how monetary decisions affect the solvency and resilience of listed deposit money banks of varying sizes. Anchored on the Monetary Policy Transmission Mechanism Theory, the Capital Buffer Theory, and the Banking Firm Theory, the paper develops an integrative conceptual framework that links monetary policy instruments such as the Monetary Policy Rate (MPR), Cash Reserve Ratio (CRR), and Liquidity Ratio (LR) to banks' capital adequacy, with bank size introduced as a moderating variable. The study argues that while monetary policy plays a crucial role in shaping banks' capital positions, its effects are asymmetrical: large banks, due to scale economies and diversified operations, exhibit greater resilience to contractionary policies, whereas smaller banks experience higher liquidity stress and reduced capital buffers. Drawing from current regulatory developments, including the Central Bank of Nigeria's (CBN) 2024 recapitalization directive, the paper proposes a conceptual model that underscores the necessity of size-sensitive and context- specific monetary frameworks. It concludes that achieving sustainable financial stability in Nigeria requires coordinated policy mechanisms that balance prudential regulation with institutional diversity. The study contributes to the ongoing discourse on monetary policy effectiveness in emerging markets and provides theoretical guidance for future empirical research and policy formulation.

Keywords: Monetary Policy, Bank Size, Capital Adequacy, Central Bank of Nigeria, Financial Stability, Emerging Economies