This study examines the impact of monetary policy on banking system fragility in Nigeria over the period from 1986 to 2022. The financial time series approach was use to gather secondary data since the variables investigated are quantitative. These variables include bank distressed levels, prime lending rates, maximum lending rates, savings rates, Treasury bill rates, treasury certificate rates, monetary policy rate, narrow money supply, broad money supply and currency ratio. The data for these variables were obtained annually from the Central Bank of Nigeria (CBN) statistical bulletin from 1986 to 2022. Stationarity of the variables was assessed using the Augmented Dickey Fuller (ADF) unit root technique due to the presence of structural breaks. After confirming the mixed integration nature of the variables, they were transformed to first order and modeled using the vector Auto-regression (VAR) based on co-integration tests using the methodology developed by Johansen (1991, 1995). The study found that 16.8% of the changes in the dependent variable could be attributed to variances in Model 1. This assertion is further supported by the F-statistics and the associated probability value. The result for Model II revealed that the Error Correction Model (ECM) is appropriately aligned, and the independent variables can account for 50.3% of the variations in bank distress levels. Similarly, Model three demonstrated that the independent variables can elucidate 48.7% of the variations in bank distress levels. In contrast, in Model 111, the independent variables elucidated a substantial 72.9% of the variance in the dependent variable, whereas in another context, they accounted for 35.5% of the variance. The investigation determined that a noteworthy 88% of the variations in the dependent variable could be linked to the model’s variation, a conclusion that is again supported by the F-statistics and probability value. Furthermore, 80.4% and 50% of the variations in the dependent variable could be attributed to the model’s fluctuations in distinct instances. The study’s results lead to the conclusion that a notable correlation exists between monetary policy and the level of bank distress in Nigeria. In this regard, the study recommends that the central bank should tailor its monetary policies to consider their potential impact on the stability of the banking sector. Striking a balance between growth and stability objectives is crucial.

Keyword: Monetary policy, interest rate, interest rate spread, inflation, money supply, banking system fragility, financial distress.