Does bank recapitalization affect the performance of the banking sector? The empirical evidence

Abstract

Over the last decade, financial institutions, especially the banking sector across emerging markets, have been faced with forceful recapitalizations as a result of numerous global financial crises. The study aims to investigate the effect of bank recapitalization approaches such as mergers and acquisitions, equity issues and interventions (bailouts) on the performance of the Nigerian banking sector. The notion that bank recapitalization heats up has been discussed and still does not present a proper consensus in the available literature. Therefore, topics that involve research on the strategies of recapitalization and their effects on bank performance are of interest in the literature. A survey method was used to gather data and the responses received from the regional, branch and senior managers in the banking sector were used to analyse and check to see if bank recapitalization actually affects the performance of the banking sector. Structural equation modelling (SEM) results indicated that bank recapitalization is positively related to bank performance. The results further revealed that all the recapitalization approaches have a positive and significant effect on bank performance. Thus, the use of recapitalization mechanisms for undercapitalized banks during crises or normal times is highly encouraged for sustainability and in the banking sector, as the backbone of the economy of any nation. Further suggestions for future research directions are also offered.