Regulators and Role of Banking Supervision
Obinna Chima examines the disagreement between the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation on some section of the proposed amendment of the NDIC Act 2006
The health of the economy and the effectiveness of monetary policy depends on a sound financial system. By supervising and regulating financial institutions, central banks are able to make effective monetary policy. Banking supervision involves monitoring and examining the condition of banks and their compliance with laws and regulations. Central banks also supervise banks in order to protect depositors’ against avoidable losses, thereby enhancing confidence in the financial system, promoting the smooth operation of the payments system, avoiding systemic failure of financial institutions, amongst others.
Presently in Nigeria, the Central Bank of Nigeria (CBN) in conjunction with the Nigerian Deposit Insurance Corporation (NDIC) regulates the banks. The supervisory process involves both on-site and off-site examinations. On-site examination includes the assessment of banks’ corporate governance structures, internal control systems and the reliability of information provided in statutory returns. On-site examinations can be classified maiden, routine, target, or special. They also carry out off-site examinations and risk-based supervision.
However, the CBN and the NDIC are today at daggers drawn following the move to repeal and re-enact the NDIC Act 2006, such that it would among other things, confer what is perceived as coordinate banking supervision powers and functions on the corporation.
The Disagreement
In the NDIC’s memorandum to the Senate Committee on Banking, Insurance and Other Financial Institutions on the proposed bill for the repeal of the NDIC Act 2006 and the enactment of the NDIC Act 2014, the corporation is seeking to supervise the banks without reference to the CBN. The NDIC’s position in this respect is that banks in the financial system should be equally shared between both organisations with each party able to exercise regulatory and supervisory powers over its “share” without reference to the other.
It is in this regard that the corporation proposed to examine banks and issue reports thereon without reference to the CBN. In addition, the corporation seeks to be able to remove board and management based on the report of its examinations on such banks. Furthermore, the corporation seeks to be empowered to carry out the consolidated supervision of banks subsidiaries, associates and affiliates without due regard for the central bank. In addition, the NDIC is also seeking for powers to license banks and appoint itself as a regulator.
Managing Director, NDIC, Alhaji Umaru Ibrahim had argued that the corporation wants to promote transparency, accountability and probity with the proposed amendments to the NDIC Act. He said the proposed NDIC Act wants the representatives of the CBN and the Ministry of Finance on its board to be amended from directors to deputy governor and Permanent Secretary so as to achieve a higher level coordination in banking policy formulation and implementation.
Umaru further argued that the banks have become conglomerates, having established a number of subsidiaries, stressing the need for enhanced supervision. He noted that it is imperative that the corporation through the auspices of the Financial Services Regulation Coordinating Committee (FSRCC) have access to the books and affairs of all the subsidiaries of insured banks to enable it assess on-going transactions between them.
“The NDIC is concerned that there is the need for a statutory contingency plan to address open bank resolution to prevent failure as much as possible. There is the need to set up an Insured Institution Resolution fund that would be used to address distress on a going concern basis. We therefore propose the establishment of such a fund in a new Subsection (3) of the extant section 37,” he added.
But, the CBN, in its presentation, insisted that there are several objectionable clauses in the proposed Act, which it stated aimed to make the NDIC a parallel/coordinate regulator for banks as the central bank; confer conflicting supervisory functions and powers on NDIC over banks; and create overlapping regulatory responsibilities for the NDIC.
“It is pertinent to mention that all the above powers, which the NDIC seeks to assume and exercise, are ostensibly to ensure that it carries out its function as a risk minimiser and that depositors of distressed banks and other deposit taking financial institutions are paid in good time to avoid delays.
“While the CBN supports the desire to pay depositors of distressed institutions in good time, the proposal to make NDIC “the judge and juror” in cases involving banks is fraught with dangers and is a recipe for financial instability. It is indeed the ingredient for chaos and anarchy and is not practiced in any financial system in the world.
“There is also the moral hazard of the NDIC as a deposit insurer that charges premium on the basis of the riskiness of an institution which it supervises without recourse to the CBN to rate such institutions as riskier than they actually are in order to enhance the premium charged to bolster the deposit insurance fund. Consequently, it is essential that the NDIC must flow from its primary function, which is the basis for its establishment, that is, deposit insurance. Then and only then, will its role in the financial system as it relates to banks and other deposit taking financial institutions be properly defined.
“Consequently, the new powers that the corporation seeks to assume and exercise are not only difficult to subsume under its responsibilities as detailed above, but are alien to deposit insurance practices in those jurisdictions,” the CBN added.
Capacity for Banking Supervision
Analysts argued that the global financial crisis showed that it is ideal that the role of banking supervision should be left for the central bank as a lender of last resort. The central bank is the ultimate guarantor of financial stability, and cannot make good on that guarantee in the absence of the kind of information that can only be obtained through hands-on supervision.
When supervision takes place outside the central bank, monetary policy makers will have less capacity to compel supervisors to share, they also pointed out.
A Senior Lecturer on Development Economics at the Lagos Business School, Pan Atlantic University, Dr. Bongo Adi, described the move by the NDIC to assume full supervisory role over banks as a no- brainer.
He added: “Banking supervision, everywhere in the world is handled by the regulator. Is the NDIC trying to usurp the regulatory functions of the central bank? If they can be the regulator, then they can also supervise. But it is the central bank that has that powers. Regulator means to have a supervisory oversight.
“So, if the regulator doesn’t supervise, then what else is its function? The NDIC is an insurance corporation. As an insurer, if they feel the risk in the system is high, they can increase the premium and the premium takes care of every risk that you are exposed to, and it is paid before an event. I think the NDIC should worry about that and not usurping the role of the central bank.”
Also, the Head of Research at Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said the move by the NDIC is not a positive one.
“The NDIC doesn’t have the expertise to supervise banks alone and for the lawmakers to empower the NDIC may undermine financial system stability. All that needs to be done is to empower the CBN to become more effective in its banking supervision role,” Ebo added.
Also, the Managing Director/Chief Executive Officer of an investment bank, who preferred to remain anonymous, said: “We cannot come out with a therapy without diagnosis.”
He added: “When we carry out a study on the cause of banking crisis in Nigeria, and it is proved empirically that it is as a result of poor supervision and that the poor supervision is because of the fact that it is domiciled within the central bank, then we can come out with a solution. I don’t think we can come up with a therapy without diagnosis.”