Modelling Risk Management in Banks: examining why banks fail

Modelling Risk Management in Banks: Examining Why Banks Fail by Okehi Daniel Msc, University of Lagos, 1990 Bsc, University of Lagos, 1982 Dissertation Submitted in Partial Fulfillment of the Requirement for the Degree of Doctor of Philosophy Management Walden University December 2014 Abstract The persistent bank failures in the Nigerian financial system have been a major concern of the government, depositors, shareholders, and the general public because of the important roles banks play in the economy. The aim of this research was to determine why there have been persistent bank failures in Nigeria and to investigate whether ineffective risk management in banks, coupled with poor corporate governance practices and nonadherence to regulations (independent variables), play a significant roles in the banks' performance(dependent variable). The variables were operationalized by taking VaR as the proxy for risk management, having CRO as proxy for ERM , CAR as proxy for corporate governance, and ROE as proxy for performance. The square gap model formed the theoretical basis of this study. The research design was survey design, and a survey instrument was used to collect data from the target population of 300 senior bank executives who were randomly selected from the 24 operating banks in Nigeria. A multiple regression model was used to examine if risk management, governance practices, and regulation adherence significantly predicted bank performance. The findings of the study confirmed that there is a significant positive relationship between the independent variables and the dependent variable. These findings suggest that, by adopting effective risk management, improving corporate governance practices, and adhering to regulations, Nigerian banks can improve their performance. This research has positive social implications for those in the banking industry by ensuring the safety of the depositors' funds in banks, and stabilizing the payment system in the economy, which historically would have been disrupted by systemic failure in the banking industry.The persistent bank failures in the Nigerian financial system have been a major concern of the government, depositors, shareholders, and the general public because of the important roles banks play in the economy. The aim of this research was to determine why there have been persistent bank failures in Nigeria and to investigate whether ineffective risk management in banks, coupled with poor corporate governance practices and nonadherence to regulations (independent variables), play a significant roles in the banks' performance(dependent variable). The variables were operationalized by taking VaR as the proxy for risk management, having CRO as proxy for ERM , CAR as proxy for corporate governance, and ROE as proxy for performance. The square gap model formed the theoretical basis of this study. The research design was survey design, and a survey instrument was used to collect data from the target population of 300 senior bank executives who were randomly selected from the 24 operating banks in Nigeria. A multiple regression model was used to examine if risk management, governance practices, and regulation adherence significantly predicted bank performance. The findings of the study confirmed that there is a significant positive relationship between the independent variables and the dependent variable. These findings suggest that, by adopting effective risk management, improving corporate governance practices, and adhering to regulations, Nigerian banks can improve their performance. This research has positive social implications for those in the banking industry by ensuring the safety of the depositors' funds in banks, and stabilizing the payment system in the economy, which historically would have been disrupted by systemic failure in the banking industry. Modelling Risk Management in Banks: Examining Why Banks Fail by Okehi Daniel Msc, University of Lagos, 1990 Bsc, University of Lagos, 1982 Dissertation Submitted in Partial Fulfillment of the Requirement for the Degree of Doctor of Philosophy Management Walden University December 2014 Dedication To my loving wife, Audrey Adaure Okehi, for her support, and our lovely children, Uchechi, Tochi, Ugochi, Daniel and David. Acknowledgments I wish to thank God Almighty who sustained me all through the program. My profound gratitude goes to Dr. Mohammad Sharifzadeh, my mentor and the chair of my supervising committee for all his assistance and encouragement all through this PhD Program. His professional touch and dedication in supervising my work gave me the encouragement to complete the project. I am also grateful to Dr. Robert Aubey who agreed to serve on my supervisory committee and helped in giving me very useful corrections and assisting the chair in providing the required direction on the project. I equally owe a depth of gratitude to my colleagues in Brickred Consult Limited for their encouragement and assistance all through my study period. I am equally grateful to the Risk Management Association of Nigerian Banks whose members in all the operating banks in Nigeria helped in providing the required material for the study. My special thanks also go to the Governor of Central Bank of Nigeria (CBN) and to the Managing Director of Nigerian Deposit Insurance Corporation for authorizing the release of the required secondary data for the project. I am also grateful to the Heads of Research Departments of CBN and NDIC for their assistance all through the research exercise. I am also thankful to Mr. Aderemi Eto of the University of Lagos and my staff Kehinde Abioye, Kenneth Anyanwu, Emeka Afamefuna, and Uwandu Nlekwuwa whose inputs and encouragements helped me in completing the project. I am also grateful to all my class mates in Research Foundation Course (RSCH 8100Z) and Advanced Quantitative Methods Course (RSCH 8250Z) who through their suggestions contributed in shaping up the research project. I am equally thankful to the two Faculty members who took us on those courses Dr. Christos Makrigeorgis and Dr. Thomas Spencer for their patience and directional guide on this research project. Finally, I owe a depth of gratitude to my lovely wife Audrey and my daughters, Uchechi, Tochi and Ugochi for their prayers and encouragement all through the program.