Financial Risk and Commercial Banks Soundness: A Panel Data Study of Quoted Commercial Banks in Nigeria

This study focused on the effect of financial risk on commercial banks soundness in Nigeria. The specific objective was to investigate how credit risk, interest rate risk, exchange rate risk, liquidity risk and cash flow risk affect commercial banks soundness. Two multiple regression was formulated to examine the effect of the independent variables on the dependent variables. Commercial banks soundness was measured by asset quality indicator and earnings and profitability indicator. Cross sectional data was sourced from financial statement and annual report of 15 quoted commercial banks in Nigeria. Ordinary least method of unit root and granger causality test was used to investigate the dynamic effect of financial risk on commercial banks soundness. The study found that financial risk can explain 30% variation on asset quality indicator; cash flow risk, credit risk and exchange rate risk have negative effect while interest rate risk and liquidity risk have positive effect on asset quality indicator.