East African Scholars Journal of Economics, Business and Management Abbreviated Key Title: East African Scholars J Econ Bus Manag ISSN 2617-4464 (Print) | ISSN 2617-7269 (Online) Published By East African Scholars Publisher, Kenya Volume-5 | Issue-8 | Sep-2022 | DOI: 10.36349/easjebm.2022.v05i08.006 *Corresponding Author: Adamu Hassan 236 Department of Economics, Sokoto State University, Sokoto, Nigeria Original Research Article Monetary Policy Shocks and Health of the Banking Sector in Nigeria Adamu Hassan 1* , Zubairu Ahmad 2 1 Department of Economics, Sokoto State University, Sokoto, Nigeria 2 Department of Business Administration, Al-Qalam University, Katsina, Nigeria Article History Received: 30.07.2022 Accepted: 03.09.2022 Published: 16.09.2022 Journal homepage: https://www.easpublisher.com Quick Response Code Abstract: This study examines the reaction of banking sector health to the shocks of monetary policy in Nigeria using a monthly time series dataset from January 2010 to December 2021. In the estimate instruments of monetary policy such as monetary policy rate, open buyback, treasury bills, liquidity ratio and cash reserve ratio were used while banking sector health was measured as loan- to-asset-ratio and loan-to-deposit ratio. In addition, the impulse response function was used as the technique of analysis. The results of this study reveal that monetary policy rate and cash reserve ratio impulse adverse shocks to banking sector health measured as a loan-to-asset ratio, while open buyback, treasury bills, and liquidity ratios have caused a positive shock to banking sector health. Differently, from the loan-to-deposit ratio, this study shows that shocks to the monetary policy rate, open buyback, and cash reserve ratio have transmitted negative shocks to the health of the banking sector. In addition, shocks from treasury bills and liquidity ratios have led to a positive reaction from the side of banking sector health. To make the banking sector so strong, the central bank should reduce the monetary policy rate and cash reserve ratio, and increase treasury bills and liquidity ratio. Keywords: Monetary policy, the health of the banking sector, impulse response function. Copyright © 2022 The Author(s): This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY-NC 4.0) which permits unrestricted use, distribution, and reproduction in any medium for non-commercial use provided the original author and source are credited. INTRODUCTION Monetary policy is one of the fundamental tools used by the Central Bank to influence output, employment, the balance of payment and stabilize prices among others (Olayiwola, 2018). It involves the application of instruments such as monetary policy rate, cash reserve ratio, liquidity ratio and so on. Furthermore, the manipulation of the foregoing instruments can have a direct or indirect influence on the real sector, government sector, external sector and, monetary and financial sector of the economy. In addition, the use of monetary policy instruments depends on the shocks and economic conditions of every country. However, monetary policy shocks are measures of unforeseen movements in monetary policy and comprise policy evidence concerning the future development of the central bank. Moreover, the shocks in the policy may strongly affect the value of deposit money banks’ financial assets (Alexander & Haraid 2019; Bernanke & Kuttner, 2005; Gürkaynak, Sack & Swanson, 2005; Peek & Rosengren, 2013). Furthermore, the banking financial crisis due to the 2008 global financial and economic meltdown, led to creating a wide consciousness about the position of banks in the monetary policy transmission to the real economy. Hence, the need for banks to be conversant with likely macroeconomic policy shocks that may have a greater influence on the health of the sector (Alexander & Harald, 2019). There are quite several previous studies from Nigeria that examined the influence of monetary policy shocks on some macroeconomic variables such as economic growth, exchange rate volatility, stock market, income inequality and oil price shocks (Aliyu, 2012; Abrokwah, 2019; Apanisile, 2021; Babatunde & Olufemi, 2014; Gbalam & Tonprebofa, 2022; Olayiwola, 2018; Salami & Toriola, 2021; Shobande, 2019). Furthermore, only a few responded to the development in the banking sector in Nigeria (Adesina, Nwidobie & Amadi, 2018). However, the study of Adesina, Nwidobie and Amadi, (2018) focused on assessing the nexus between monetary policy and the performance of the banking sector in Nigeria. Hence, this study deviates from the work of Adesina, Nwidobie and Amadi, (2018), because it focuses on examining monetary policy shocks on the health of the banking