BANK FAILURE RESOLUTION IN NIGERIA: THE BRIDGE BANK OPTION Being Paper Presented at the Workshop for...

BANK FAILURE RESOLUTION IN NIGERIA: THE BRIDGE BANK OPTION

Being Paper Presented at the

Workshop for Business Editors and Finance Correspondents Association of Nigeria

(FICAN)at

Manpower Development Institute, Dutse, Jigawa State

Adeleke A. A.DirectorAsset Management Department, NDIC

Bank Failure Resolution in Nigeria: The Bridge Bank Option.

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OUTLINE

Introduction Applicable Failure Resolution Options:

Rehabilitation; Deposits Pay-out; Insured Deposits Transfer; and Purchase and Assumption (P&A)

Bridge Bank Mechanism Why Adopt Bridge Bank Mechanism? Public Reaction / Challenges


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INTRODUCTION

Effective resolution is a series of systematic action designed to end a bank’s distressed condition.Focus of a good resolution option: Maintains public confidence and stability in the

banking system. Ensures fairness, equity, transparency and

accountability. Instills market discipline while discouraging moral

hazards. Achieves minimum disruption to payment

system.


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INTRODUCTION

Speedy payment to insured depositors and quick realization of assets for the benefits of uninsured depositors and creditors.

Minimize the likelihood of having to bail-out uninsured depositors and creditors.

A typology of problem banks Illiquid but solvent Insolvent but liquid Illiquid and insolvent.


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RESOLUTION OPTIONS

Rehabilitation Financial Assistance (Accommodation Facility). Imposition of Holding Actions. Change in Management. Take-Over of Control & Management. Acquisition & Sale of Banks.

Deposit Payout Insured Deposits Transfer

Purchase and Assumption (P&A)


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28/11/2011 Bank Failure Resolution in Nigeria: The Bridge Bank Option.

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EXPERIENCE SO FAR

REHABILITATION Take-Over Of Control

1 Bank in 1992 5 Banks in 1993 16 Banks in 1995 1 Bank in 1996 1 Bank in 1999

Sale of Banks 7 banks sold to new investors.

EXPERIENCE SO FAR - BANK FAILURE AND EXTENT OF FAILURE IN NIGERIA BETWEEN 1994 AND 2006

Year of Closure

No of Banks Total Assets(N’B)

Total Deposits(N’B)

Ratio of Assets of Close Banks to Total Assets of Banks Ind(%)

Ratio of Assets of Close Banks to Total Deposits of Banks Ind(%)

Ratio of Assets of Close Banks to GDP(%)

Number of Depositors

1994 4 6.10 2.00 1.94 1.12 0.66 6,411

1995 1 0.40 0.80 0.09 0.38 0.02 7,416

1998 26 34.60 16.30 4.50 4.34 1.11 1,709343

2000 3 2.70 3.80 0.14 0.45 0.06 31,969

2002 1 20.20 11.60 0.68 0.95 0.35 228,585

2003 1 2.10 3.41 0.06 0.24 0.03 1,044

2006 13 160.10 177.28 1.23 4.69 0.55 961,211

TOTAL 49 165.9 215.19 0.93 2.59 0.44 3,165,979


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KEY STATISTICS TO CONSIDER

Significance of the Recent Banking Crisis Total Deposits of Banks in the System – N11.371 trillion. Eight (8) Intervened Banks Total Deposits – N2.984

trillion. Three (3) Bridge Banks Total Deposits – N816.29 billion. NDIC’s Risk Exposure N567.95 billion* as against DIF of

N353.06 billion*. Total Deposits of Forty-nine (49) Banks Closed prior to August,

2011 – N215.19 billion.


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KEY KEY STATISTICS TO CONSIDER (Cont (Cont’d)

Total Assets of Banks in the System – N16.542 trillion.

Total Assets of the 8 intervened banks – N3.950 trillion.

Total Assets of the 3 Bridge Banks – N895 billion. Total Recapitalization required by 8 intervened

banks – N1.638 trillion. All Figures as at 31st May, 2011.


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BRIDGE BANK MECHANISM

A new bank created to acquire assets and assume liabilities of the failed bank. It is a variation of P&A.

New bank could be privately owned or the government could create it for the purpose.

If government owned, it could be operated for about 2 years after which it would be sold to fresh investors.

(i) Merits Avoid losing the failed bank thus protecting jobs

and continuing banking services to the community.


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BRIDGE BANK MECHANISM (Cont’d)

All shareholders would lose their investments. All depositors and creditors would be covered

and that would engender public confidence in the banking system.

(ii) Demerits Undermines market discipline as it encourages

moral hazard. It could be costly. The bridge bank could fail thus postponing the

“evil day” and aggravating the cost of resolution.


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IA22 OUTCOME OF IADI’s SURVEY

To maintain daily operations of a failed bank. When number of failed institutions is very large and

the failures occurred during a short period of time. In cases where the Liquidator is reluctant to

proceed with formal liquidation because either the failed bank is too large (so no adequate funds are available for reimbursement) or there is not enough time to market the bank’s assets to potential acquirers.

Bank with an attractive franchise is in danger of

failing before acquirers can be found.


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WHY NDIC ADOPTED BRIDGE BANK MECHANI MECHANISM

Provided for in Section 39(1) of NDIC Act, 2006. The 3 affected banks had attractive franchise and

deterioration in their assets would hamper their sale. Depositors were protected thus promoting confidence

in the system by ensuring continuity of banking services.

Outright liquidation would have had dire consequences on depositors & other stakeholders.

The most cost effective option considering the size of the 3 banks, volume of deposits and number of their employees.


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P PUBLIC REACTION / CHALLENGES

Minimal or no panic withdrawals by depositors. Market acceptance of assurance by Regulatory

Authorities that all deposits were protected. Some stakeholders felt measure taken was

preferable to outright liquidation. Delicate process of incorporating shelf companies

that became Bridge Banks. Court action by erstwhile shareholders. Cumbersome, slow and bureaucratic judicial

process.


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WRAP UP

THANK YOU FOR LISTENING!


1528/11/2011

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