Banking Reforms in Nigeria2

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					Banking Reforms in Nigeria: The Way Forward




                           By

        Temitope W. Oshikoya, Ph.D
                    Director-General
         West African Monetary Institute, Accra




                  Dr. Temitope Oshikoya           1
Presentation Outline

  Recent banking crises
  Options for Re-capitalizing banks
  Banking Risk Management
  Corporate governance
  Supervisory and regulatory framework
  Macro-financial stability
  Tying it together: Lessons from Indonesian
   Experience
  Cross-border Implications
  Conclusion


                    Dr. Temitope Oshikoya       2
Recent Banking Crises
   Stylised Facts
     Since 1970s, over 120 episodes of systemic crises (see
        Laeven and Valencia, 2008; Lingren, Gracia and Saal
        (1996)
     More than 50 cases of borderline or non-systemic crises
     Average fiscal cost of 18% of GDP (Hoggarth, G. et al
        2001)
     Average output losses of 20% of GDP (Laeven and
        Valencia, 2008) in first 4 years of crisis
     Bank lending, profitability, and investment subdued
     Losses and costs higher when there is also a currency crisis
     U.S., U.K., Japan, Norway, Sweden, Spain
     Mexico, Argentina, Venezuela, Indonesia, Korea, Russia,
        Bulgaria, Ghana
     Nigeria had episodes of banking crises, but the CBN had
        taken steps to prevent a full blown banking crisis this time
        around

                          Dr. Temitope Oshikoya                    3
Recent Banking Crises
 Selected Banking Crises: Non-Performing Loans and Costs of Restructuring Financial Sector
                      Year       Duration Non-performing      Bank      Fiscal and  Output loss                     Currency
                                  (year)  Loan (% of total Credit/GDP% Quasi-fiscal (% of GDP)                    Crisis as well
                                              loan)(a)          (b)
                                                                       Costs/GDP(c)                                (pre-fix**)
 High Income
 Japan           1992-98               7.0              35.0            119.5         8.0 (17)               No
 Korea           1997-                                 30-40             70.3            34.0           50.1 Yes**
                                                                                             (d)
 United State    1984-91               8.0               4.0             42.7            3.2                 No
 Argentina       1980-82               3.0               9.0             29.8           55.3            10.8 Yes**
 Argentina       1995                  1.0               n/a             19.7            1.6             7.1 No
 Argentina       2001                                   20.1                             9.6            42.7
 Bulgaria        1996                                   75.0                            14.0             1.3
 Egypt           1980                                                                    n/a            38.1
 Ghana           1982-89               8.0              35.0              25.2           6.0            15.8 Yes**
 Guinea          1985, 1993                             45.0                             3.0             n/a
 Indonesia       1994                  1.0               n/a              51.9           1.8                 No
 Indonesia       1997-                                 65-75              60.8         50-55            67.9 Yes**
 Malaysia        1985-88               4.0              33.0              64.5           4.7            50.0 No
 Mexico          1981;1994-95          2.0              11.0                31          20.0            51.3 Yes**
 Nigeria         1991                                   77.0                             n/a             0.4
 Thailand        1997-                                  46.0            118.8           43.8            97.7 Yes**
 Uruguay         1981-84               4.0              36.3             33.4           31.2            87.5 Yes**
 Venezuela       1994-95               2.0              24.0              8.9           20.0             9.6 Yes**
Source: 1. Adapted from Laeven, Luc A. and Valencia, Fabian V., (September 2008) and
        2. Hoggarth, G, Reis, R. and Saporta, V. (2001)
NB.:    a) Estimated at peak and comparisons should be treated with caution
       b) Average during crisis period; c) Estimates of the cumulative fiscal costs during restructuring period
       d) Cost of Savings and Loans clean up

                                                 Dr. Temitope Oshikoya                                                       4
Recent Banking Crises
   Identifying the causes
     Fundamental: macroeconomic and business cycles; e.g. oil
       shocks; anticipation of balance sheet impairment and
       insolvency
     Panic: Sunspots emanating from market, policy, and
       political shocks; shifts in market expectations spread panic;
       bank runs due to illiquidity
     Moral hazard: implicit and explicit guarantees; excessive
       risk taking behaviour; boom-bust cycles; asset pricing
       bubbles
     Institutional: corporate governance; principal-agency
       incentive problems; inadequate supervisory and regulatory
       framework
     Nigeria: Interaction of several factors including financial
       liberalization, oil price shocks; massive credit expansion,
       unsustainable debts, over-inflated assets, economic
       downturns, institutional related factors. So far, CBN has
       contained panic and regional contagion

                          Dr. Temitope Oshikoya                   5
   Options for Re-capitalizing Banks: Methods
                                                                 Bank Insolven t



                Ba nk sta tus u nchan ged                      Ba nk sta tus ch ange d         Liquida tion



                     Finan cia l injectio n from
                     existin g sharehold ers or
                           o th er parties


P rivate
sector
solu tions
                                                              Unas sis ted p rivate se cto r
                                                               merger/take-over (M&A)




                                                               As sis ted p rivate s ecto r        Liquidate
Government
                                                                      merger/P&A                     b ank
assisted
so lu tion s




                                                                                                  Compe nsate
                                                                              S ell assets
                                                                                                   creditors




                      Governme nt ass istanc e
                                                                     Brid ge ban k/
Go vern men t           (LO LR, o pen ban k
solutions                                                           Natio nalisation
                            as sis tan ce)


                          Source: Hogg ar th, G ., J. Reid hill a nd P. Sinclair (2003)



                                                Dr. Temitope Oshikoya                                          6
Options for Re-capitalizing Banks: Methods

      Country         Government       Asset management  Domestic         Foreign bank
                     capital injection   corporation(s) bank merger         takeover

China                          •                   •                  •
India                          •               examined               •     allowed
Indonesia                      •                   •                  •
Korea                          •                   •                  •     allowed
Malaysia                       •                   •                  •
Phillipines (in 1980s)                             •                  •        •
Thailand                       •                   •                  •        •
Argentina                                                             •        •
Brazil                                                                •        •
Chile                          •                    •                 •
Colombia                       •                    •                 •     allowed
Mexico                         •                    •                 •         •
Venezuela                      •                    •
Czech Republic                                      •                 •     allowed
Hungary                         •                   •                 •
Russia                          •                                     •
Saudi Arabia                    •                                     •
Japan                           •                  •
Source: Adapted from Banking   in emerging and transition economies
                                    Dr. Temitope Oshikoya                          7
Who bears the losses?
                                    Shareholders           Managers Creditors          Employees
                                    (lose money)           (lose    (lose money)       (lose jobs)
                                                           jobs)
Bank status unchanged
Shareholders capital                No                     No         No               No
injection
Government injection                Probably,              Probably   Possibly, partly Probably
                                    partly
Bank status changed
Merger and acquisition              Probably,              Possibly   Possibly, partly Possibly
                                    partly
Purchase and assumption             Yes                    Possibly   Yes if P&A       Possibly
                                                                      partial
Nationalisation/bridge              Yes, partly            Probably   Possibly         No
bank
Liquidation                         Yes                    Yes        Yes, uninsured   Yes
Source: Hoggarth, G., J. Reidhill and P. Sinclair (2003)
                                          Dr. Temitope Oshikoya                                      8
Banking Risk Management
               Origins of Shocks to the Banking System



                                Real Sector                 External Sector
 Government
   Sector




                                 Banks




                                                    Lenders/Liabilities
       Borrowers/Assets



  Source: Karl Dressen (2007) "Albania:Stress Testing for Banking Supervisors"
  in Building Monetary and Financial Systems:Case S tudies in Technical Assistance
  Edited by Enoch, C., et. al. (2007), IMF


                            Dr. Temitope Oshikoya                             9
       Any Way out?
Committee of Sponsoring Organizations (COSO) Enterprise Risk Management Framework
         Functions                  Activities        Internal  Management Risk & Event      Risk      Risk     Control       Information  Monitoring
                                                    Environment Objectives Identification Assessment Response   Activities   Communication
Enterprise:                                             Tone
1. Strategic planning                                            Strategic    People      Likelihood  Avoid      Policies    Identify relevant     Monitor
                                                      Integrity                                                                information       entire ERM
1. Governance                     Activities                                                                                                       Process
2. General management             required to          Ethics
3. Infrastructure and Own         perform each of   View of risk    Operational   Processes   Impact   Reduce   Procedures       Capture          Ongoing
capacity development              the 10 separate                                                                                                 activities
5. Business development           functions            Risk
                                                    management      Reporting     Systems              Share                  Communicate         Separate
                                                    philosophy                                                                                   evaluations
Operational:                                                                                                                                       Modify
6. New Client portfolio set-up                      Risk appetite   Compliance    External             Accept                 Enable people       processes
7. Portfolio management                                                            events                                      to carry out         where
8. Settlement and control                                                                                                    responsibilities      needed
9. Valuation & accounting
10.Risk analytics

                                 Source: Greuning, H.van and S.B. Bratanivic (April 2009)

                                                                     Dr. Temitope Oshikoya                                                       10
Corporate Governance
 Addressing the main issues:
   Quality of board members and effectiveness of
    board sub-committees
   The use independent directors on the board
   Senior management oversight
   Human resources and appropriateness of
    incentive schemes
   Aligning profit drive with prudential risk
    management
   New product approval process
   Effectiveness of risk management and credit
    information sharing
                   Dr. Temitope Oshikoya            11
Supervisory and regulatory Issues
 Key Issues
   Continuous monitoring of international developments
   System wide – macro prudential - approach to
     supervision by supervisors
   interaction and monitoring of behaviour between
     banks
   control pro-cyclicality and factor it into supervisory
     responses. capital adequacy buffers can be reviewed
     as a means to addressing the problem
   Firmed and consistent approach to reporting on
     transparency and disclosures
   Periodic risk assessment reports; micro-prudential
     trends, etc.
   Training programme for non-executive board
     members of banks; actuarial valuations and risk
     management
                       Dr. Temitope Oshikoya             12
Macro-Financial Stability
 complicates valuation of banks’ assets
  and financial risks
     Exchange rate and asset price volatility;
     Interest rate volatility
     Oil and food shocks
     Inflation variability
     The trilema problem



                   Dr. Temitope Oshikoya      13
Lessons of Indonesian Experience
 Bank Resolution procedure
   Open-bank resolution and emergency liquidity
    support; forestall illiquidity or insolvency
   Established asset management company to
    restructure problem banks – Indonesian Bank
    Restructuring Agency
   Introduced blanket guarantees
   Instituted surveillance activities; take-overs and
    closures of poorly performed banks
   Due diligence; mega merger of state-owned
    banks
   Liquidation; recapitalisation programme

                    Dr. Temitope Oshikoya            14
Lessons of Indonesian Experience
 Bank Restructuring process
   Due diligence diagnostic review; determine banks’
     solvency and recapitalisation costs
   Self-recapitalization or joint-government
     recapitalization
   Joint recapitalization programme contingent on a
     viable business plan; fitness and probity of banks’
     management and controlling shareholders
   Business plan preparation by the bank
   Review business plan and asses capability to inject
     funds to meet CAR, etc.
   Perform a fit and proper test
   Transfer a bank bad loans to asset management
     company; sign the recapitalization agreement; inject
     additional capital

                      Dr. Temitope Oshikoya             15
Lesson of Indonesian Experience
     Framework of Financial S ystem Stability (FSS)

                                     well-man aged
       stab le                         f inancial                 sou nd fram ework
  macroeconomic                       institutions                  of prudential
   e nviron ment                                                     supervision


                                    stable and sound
   e fficient financial             fin ancial system              safe and robust
          markets                                                 payme nts system




     C oordination &                                                    Crisis
                            Surveillanc e          Re gulation
       cooperat ion                                                  M anage ment
     -I nternal            Early Warning         -Reg ulat ory      -L en der of last
      Coord iant ion       Systems                Fram ework         resort
     -External             -Macroeconomic        -Financial         -Deposit
      Coord in at ion       Indicat ors           Architectu re      insurance
     -Join t Comm itt ee   -Micro-p rud ential   -Market            -Crisis resolut ion
                            Indicat ors           d iscip line



    Source: Batunanggar, S . (2002)



                                Dr. Temitope Oshikoya                                     16
Lessons of Indonesian Experience
   Open bank resolution strategy and implicit guarantees not
    effective-moral hazard; higher resolution costs
   Bank closure should be executed rapidly with a clear
    contingency plan and risk mitigation strategy
   A blanket guarantee is important, well timed and used
    temporary
   A transparent and clearly-defined lender of last resort policy
    and procedure for crisis management
   Bank restructuring policies should be transparent, uniform and
    implemented consistently
   Combination of micro and macroeconomic policies is required
   Effective cooperation between related institutions
   Institutional capacity is important
   Political intervention and lack of commitment a crisis is
    disruptive
   Prudential banking regulation and supervision is a key element
    in creating and maintaining financial stability

                          Dr. Temitope Oshikoya                 17
       Towards Long-term financial sector development

                              Build Legal and                    Build Other                                             Develop Financial          Upgrade
    Establish                                                                                     Develop
     Policies
                                Regulatory                    Financial Sector
                                                                                                Institutions
                                                                                                                         Instruments and             Skills
                               Framework                       Infrastructure                                                 Markets



                                                              Banking and other
                                                                                      Banks                                                         Seminars for
   Macro Stability                                            financial supervision
                        Institutions                                                  -Micro and cooperative         Fixed-Interest instruments     policymakers
                        -Companies                                                    -Specialized                   -Equities
                        Central bank                                                  -Commercial                    Currencies
                        Banks                                                                                        -Commodities
                        Insurance companies                   Accounting and                                         -Derivatives
Political Environment                                                                                                                             Training Institutes
                        Pension funds                         actuarial professions                                  -Insurance
                        Investment funds                                                                             -Other finance/instruments
                        -securities intermediaries                                    Contractual Savings              -Term (leasing)
                                                                                      -Insurance                       -Securitization
 Legal and Judicial                                                                   -Pensions                        -Housing loans               Institutional
                                                              Payments systems
   Environment                                                                                                         -Agricultural credit         development
                                                                                                                       -Suppliers credit
                        Markets
                                                                                                                       -Guarantees

 Transparency and                                             Property rights         Capital Markets/exchanges
     Disclosure                                               registries              -Securities trading and fund
                        Contracting and Conduct                                        management
                        -Contract enforcement                                         -Exchanges
                        -property rights                                               -Equities
                        -Lending/collateral                                            -Fixed interest bonds
                        -Financial instruments                   Share registries      -Government
                        -Market Conduct                                                -Municipal
                        -Wholesale and retail investment                               -Private sector companies
                         services                                                      -Commodities
                        -Accounting and auditing               Research and rating
                        -Regulations for Legal framework            agencies



                        Failure resolution laws
                                                                    Exchanges
                        -Insolvency
                        -Deposit Insurance
                        -Restructuring agencies
                                                           Source: Greuning, H.van and S.B. Bratanivic (April 2009)

                                                                         Dr. Temitope Oshikoya                                                       18
Cross-border Implications
 Nigerian banks dominate the banking industry in the
  WAMZ

 The cross border establishment of subsidiaries by
  Nigerian banks in the across WAMZ countries curiously
  pose challenges for financial stability
   Risk of regional systemic crisis due to a run on
     Nigerian banks elsewhere; cross border panic
   Significantly leveraged regional financial environment
   misaligned cross-border incentives

 A strong bail-out of problem banks with impaired capital
  by the CBN in 2009 was very important in maintaining
  stability in the WAMZ financial sector.


                       Dr. Temitope Oshikoya             19
Distribution of Commercial Banks in West Africa


        Table 8.1a: Distribution of Commercial Banks in West Africa

WAEMU                                               WAMZ +Liberia & Cape Verde
Benin                                22             Cape Verde                             23
Burkina Faso                         13             The Gambia                             11
Guinea Bissau                        2              Guinea                                 8
Mali                                 14             Liberia                                5
Niger                                9              Nigeria                                24
Cote D’Ivoire                        18             Ghana                                  24
Senegal                              14             Sierra Leone                           13
Togo                                 11
Total                                103            Total                                  108
        Source: Staff compilation from World Bank, 2007: Financial Sector Integration in
        Two Regions of Sub-Saharan Africa and WAMI’s survey questionnaire
                                         Dr. Temitope Oshikoya                                   20
Cross-Border Banking in WAMZ – Locations of Subsidiaries


                     Home             The          Ghana Guinea Nigeria Sierra
                     Supervisor       Gambia                            Leone
 Stanchart               UK                                     
 Ecobank               TOGO                                            
 GT Bank                NGN                                             
 Intercontinental       NGN                                      
 First International    GMB                                              
 Stanbic                ZAF                                      
 Zenith                 NGN                                             
 United Bank for        NGN
 Africa                                                                 
 Oceanic Bank           NGN                                      
 Access Bank            NGN                                              
 Skyle Bank             NGN                                              
 Bank PHB               NGN                                       

                                  Dr. Temitope Oshikoya                        21
Cross border implications: Next
steps
 improving the resilience of domestic and regional
  markets

 regulation to tackle cross border banking crisis – laws,
  and in particular, bankruptcy laws are different

 supervisors to have sound knowledge of the firms they
  supervise, strict compliance to governance issues and
  regional supervisory cooperation

 Operationalized a Memorandum of              Understanding
  adopted by WAMZ member countries



                       Dr. Temitope Oshikoya                 22
MoU: complementary coordinated supervisory
strategy
   Crisis management should be institutionalised at the
    regional level to facilitate swift information sharing;
   put in place enhanced guidelines to strengthen bank’s risk
    management practices;
   establishment of comprehensive contingency planning; and
    strong organisation-wide governance;
   streamline mechanisms for early intervention: stabilisation
    measures for ailing banks stipulating conditions under
    which they will be applied as well as deposit guarantee
    schemes;
   A firmed and consistent approach to reporting on
    transparency and disclosures;
   stress testing of the industry and periodic risk assessment
    reports. Assessments of micro-prudential trends, potential
    risks and vulnerabilities in the banking sector and reported
    at least twice a year;

                         Dr. Temitope Oshikoya                 23
Conclusion
   Restructuring is a primary business of government and must
    take responsibility on how the cost of restructuring will be
    shared

   Postponing intervention makes restructuring costly and difficult

   Political consensus where key interest groups see need for
    action and the necessity of bearing some of the costs

   Restructuring must be contingent and comprehensive

   half-hearted measures undermine confidence in the banking
    system

   Poor functioning of the legal system can be a serious hindrance
    to bank restructuring; granting direct access to the courts by a
    dedicated restructuring agency or asset management company
                          Dr. Temitope Oshikoya                    24
Conclusion
 Bank restructuring measures must be accompanied
  by macroeconomic stabilization

 Functioning system-wide deposit insurance scheme

 Banking resolution facility to provide contingency
  funds to underpin a bank restructuring;

 memorandum of understanding between the
  ministry of finance, central bank of Nigeria, and
  Nigeria Deposit Insurance Corporation


                     Dr. Temitope Oshikoya             25
References
   Hoggarth, G., J. Reidhill and P. Sinclair, .2003. "Resolution of banking
    crises:                              A                           review",
    Bank of England, Centre for Central Banking Studies
   Hoggarth, G., J. Reidhill and P. Sinclair (2003) “Resolution of banking
    crises: a review”, Bank of England, Background paper on 2003 Central
    Bank Governor’s Symposium on ‘The role of central banks in preventing
    and dealing with financial crises’ p. 9
   Laeven, Luc A. and Valencia, Fabian V., .2008. “Systemic Banking Crisis:
    A New Database” IMF Working Papers, Vol. pp. 1-78, 2008. Available at
    SSRN: http://ssrn.com
   Hoggarth, G, Reis, R. and Saporta, V., .2001. “Costs of banking system
    instability: some empirical evidence” Bank of England. Working papers
    available at www.bankofengland.co.uk/workingpapers/index.htm
   Greuning, H. van and S.B. Bratanovic, .2009. Analyzing Banking Risk: A
    Framework for Assessing Corporate Governance and Risk Management,
    The World Bank, Washington, D.C.
   Karl Dressen .2007. "Albania: Stress Testing for Banking Supervisors“ in
    Building Monetary and Financial Systems: Case Studies in Technical
    Assistance Edited by Enoch, C., et. al. (2007), IMF
   World Bank, .2007. Financial Sector Integration in Two Regions of Sub-
    Saharan Africa



                             Dr. Temitope Oshikoya                        26

				
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