Relative Solvency and Bank Stability: Assessing the Financial Health of selected Deposit Money Banks in Nigeria (2017-2021)

Abstract

The persistent challenge of maintaining bank solvency and financial stability has intensified following successive global financial crises and the implementation of Basel III regulatory reforms. Although several financial distress prediction models have been developed, their suitability for evaluating banking institutions remains uncertain because most were originally designed for non-financial firms. This study evaluates the effectiveness of a modified Enyi's Relative Solvency Ratio (RSR) alongside four widely used discriminant models—Altman's Z-score, Springate's Z-score, Taffler's Z-score, and Zmijewski's Z-score—in assessing the financial health and stability of selected Nigerian Deposit Money Banks. An ex-post facto research design was adopted using panel data obtained from the published financial statements of thirteen Deposit Money Banks covering the period 2017–2021. The computed solvency measures were analysed using fixed-effects and random-effects panel regression models, with the Hausman specification test guiding model selection and Driscoll-Kraay robust standard errors correcting for serial correlation and heteroskedasticity. The findings reveal that the Relative Solvency Ratio is a positive and statistically significant predictor of banks' working capital requirement, serving as a proxy for capital adequacy and financial resilience. Among the conventional distress prediction models, only Taffler's Z-score demonstrated significant explanatory power after robustness corrections, whereas Altman's, Springate's, and Zmijewski's models were statistically insignificant. The results suggest that banking-specific operational liquidity measures provide more reliable assessments of bank stability than traditional corporate bankruptcy prediction models. The study contributes to the banking stability literature by validating the Relative Solvency Ratio as a practical early-warning indicator of financial resilience and recommends its integration into prudential supervision and internal risk management frameworks to complement existing Basel III solvency and liquidity indicators.