Abstract Liquidity shortages have been identified as a major trigger of banking crises, particularly in emerging economies characterized by volatile macroeconomic environments and shallow financial markets. In response, post-global financial crisis reforms, including Basel III, have emphasized liquidity regulation as a core component of financial stability frameworks. This study examines the effect of liquidity regulation on banking sector stability in Nigeria over the period 2008-2023. Banking sector stability is measured using a composite financial stability index, while liquidity regulation is proxied by the sector-wide liquidity ratio in accordance with Central Bank of Nigeria (CBN) guidelines. Capital adequacy and non-performing loans are included as control variables to account for solvency and asset quality effects. Using time-series econometric techniques, including unit root tests and ordinary least squares regression, the study finds that liquidity regulation has a positive and statistically significant impact on banking sector stability. This suggests that banks with stronger liquidity positions are better equipped to withstand short-term funding shocks and prevent liquidity-driven distress. Capital adequacy is also found to reinforce stability, while non-performing loans significantly weaken the stabilizing effects of liquidity buffers. The results are consistent with the Diamond-Dybvig liquidity framework and contemporary macroprudential regulation theory. The study extends existing literature by providing empirical evidence from Nigeria, where liquidity pressures remain a key challenge despite regulatory reforms. Policy implications emphasize the need for enhanced liquidity stress testing, reduced reliance on volatile short-term funding, and closer integration of liquidity regulation with broader macroprudential policies. Overall, the study concludes that liquidity regulation is a critical, though not standalone, instrument for ensuring banking sector stability in Nigeria.
Osondu-Ekekwe et al. (Thu,) studied this question.