ASSESSING THE INFLUENCE OF ECONOMIC DOWNTURNS ON THE LIQUIDITY POSITION OF NIGERIAN COMMERCIAL BANKS

ABSTRACT This study examines the impact of economic downturns on the liquidity positions of Nigerian commercial banks, focusing on how recessions, inflation spikes, and currency volatility influence liquidity performance. The primary objectives include evaluating the effect of economic downturns on liquidity levels, analyzing the relationship between key macroeconomic variables GDP growth, inflation, and exchange rate fluctuations and liquidity indicators such as the Liquidity Coverage Ratio (LCR), Loan-to-Deposit Ratio (LDR), and buffer holdings, and assessing how regulatory interventions help mitigate liquidity deterioration during these challenging periods. The research adopts a quantitative approach using a panel design, analyzing secondary data from six purposively selected commercial banks out of the 24 licensed in Nigeria as of 2024. Both descriptive and inferential statistics were employed to explore the relationship between macroeconomic factors and banks' liquidity performance. Findings reveal that GDP growth and inflation significantly impact banks' liquidity, particularly influencing the Loan-to-Deposit Ratio (LDR). Higher GDP growth tends to improve liquidity, reflecting an expanding economy that likely supports deposit growth and loan repayment capacity. Inflation exerts a significant effect, where rising inflation pressures can erode banks' liquidity by increasing operational costs and impairing asset quality. Conversely, exchange rate fluctuations were found to have an insignificant statistical effect on liquidity ratios during the study period, indicating that currency volatility may not directly influence liquidity performance as strongly as other macroeconomic factors in the Nigerian banking context. The study underscores that liquidity management in Nigerian commercial banks is highly sensitive to domestic macroeconomic conditions, notably inflationary trends and economic output growth. These elements crucially determine banks' ability to maintain adequate liquidity buffers and manage their asset-liability profiles effectively during economic downturns. In light of the results, the study recommends that Nigerian banks strengthen their asset-liability management practices by incorporating advanced stress-testing frameworks to better anticipate and respond to macroeconomic shocks. The Central Bank of Nigeria should enhance regulatory monitoring and consider revising liquidity requirements to be more adaptive to prevailing economic realities, ensuring regulatory policies support resilience in the banking sector's liquidity positions. Furthermore, government policymakers are advised to prioritize macroeconomic stabilization efforts, including inflation control, exchange rate management, and implementation of structural reforms aimed at fostering a stable economic environment conducive to sustainable banking sector liquidity. Overall, this research contributes to the understanding of how macroeconomic downturns shape liquidity dynamics in Nigerian commercial banks and highlights the critical roles of targeted regulatory oversight and sound macroeconomic policies in safeguarding banking sector stability during times of economic stress.