NDIC, CBN firm machanism to tackle too-big-to fail risk

The Nigerian Deposit Insurance Corporation (NDIC) and the Central Bank of Nigeria (CBN) are firming up plans to institute a mechanism which will be aimed at limiting the risk that the failure of a large systemically important Nigerian lender will have on the economy.

This was disclosed at the weekend, at the maiden BusinessDay Banking Awards, by representatives of one of the two regulators (NDIC), saying that the risk of failure of a big lender oftentimes leads to a taxpayer-funded rescue.

The largest Nigerian banks (FirstBank, Zenith, Access, UBA and GTB), which are often termed by analysts as too -big- to- fail, currently control over 70 percent of all banking assets, raising concerns that a failure of one of them could lead to a repeat of the 2009 Nigerian financial and banking crisis.

“The parameters are being put in place for a mechanism by the regulators to monitor domestic systemically important banks,” Adedapo Adeleke, Bank examiner, NDIC, said at the event.

“The idea being that if a bank deemed as systemically important gets into a crisis, it can be resolved without recourse to the National Assembly.”

Adeleke disclosed that the regulators, comprising CBN, NDIC, the Securities and Exchange Commission (SEC) among others, are coming together to have consolidated supervision of the financial institutions, adding that guidelines have already been set up in that regard.

The CBN in 2009 initiated banking reforms and set up the Asset Management Corporation of Nigeria (AMCON), a unique institution that combines buying non-performing loans (NPLs), with loan restructurings and recapitalising troubled financial institutions.

The CBN intervention was necessary due to weak risk management and corporate governance in most of the banks, who had concentrated loan exposure to the oil and equities markets, the subsequent slump of

which led to non performing loans (NPLs) rising to as high as a third of total banking loans.

Data from AMCON shows that it spent N5.6 trillion ($35.5 billion) in 2011 to acquire banks’ non-performing loans, giving the banks more capacity to lend to the private sector.

However there has been some criticism of the cost and outcome of the intervention and the moral hazard issues it raises, with regard to the CBN picking winners and losers.

“The intervention has created too important to fail banks, with an implicit Government subsidy in the form of AMCON, which is a gift from taxpayers to banks,” said Okay Iheduru, a professor, in his presentation at the conference on ‘The Global Landscape of Banking Reform: Lesson for Nigeria’.

Iheduru also looked at the wreckage that the global financial crisis of 2008 had done to modern monetary policy orthodoxy, particularly with regard to inflation targeting in the USA and other developed economies, where the Federal Reserve lowered the fed funds rate drastically, which economists say failed to stem the crises.

The second wreckage, according to Iheduru ,is the damage to the Central Bank of Nigeria (CBN)’s independence, which such interventions can bring about. He added that the CBN needed to be independent from political pressures.

The banking reforms have led to the cost of risk for banks falling significantly, pronounced balance sheet clean up and better underwriting standards, sustained net interest margins due to high lending interest rates and cheap funding, as well as improved operating efficiency.

The banking regulators use risk based supervision now to pre-empt concentration risk in lending, according to Adeleke.

“Nigeria has tried to be a step ahead of the crises, with the uniform accounting year end for banks reporting, based on IFRS, strict code of corporate governance, and the ring fencing of retail deposits from investment banking,” Adeleke said.

“We have established limits on concentrated lending in the industry. We watch that closely and any bank going over that has to provide more capital.”

Nigerian bank stocks are trading at a discount to emerging-market lenders, and will probably extend gains to 42 percent this year, as they boost capital and finance oil and power projects, Vetiva Capital Management Ltd., said last week.