Economic Policy, Institutional Quality, and Bank Deposit Growth in Nigeria

This paper pinpoints how economic policy efficiency and quality of institution have influenced bank deposit growth in Nigeria during the period 1995-2023, after incorporating Taylor’s Principle to assess the responsiveness of policy through different economic regimes. Application of a Markov switching model allows the differential impacts of periods of economic expansion and contraction to be depicted on bank deposit growth, the loan-to-deposit ratios, and liquidity ratios. The findings show that the monetary policy rate, interacting with fiscal variables of government expenditure and tax revenue, exerts regime-sensitive effects on banking resilience. Simultaneously, institutional quality variables of regulatory quality and government effectiveness were observed to be highly influential in shaping bank deposit behavior over the cycle. Other determinants of the stability of banks include economic uncertainty and financial development, the later suggesting deposit protection during contraction. The study, therefore, facilitates priorities in adaptive policy frameworks in Nigeria by striking a proper balance between strong institutional frameworks and flexible economic policies that would ensure resilience in the banking sector across economic fluctuations.