Enhancing Financial System Stability
Arize Nwobu writes that the Central Bank of Nigeria, under the leadership of Godwin Ifeanyi Emefiele, has put in place a robust financial framework that would adequately promote stability in Nigeria’s financial system
At the 2017 Nigerian Bar Association (NBA) conference, the Governor, Central Bank of Nigeria (CBN), Godwin Emefiele notably remarked that the Financial Services Regulation Committee, led by the CBN was structuring a robust financial framework that would adequately promote stability in Nigeria’s financial system.
Considering the key importance of the financial system in driving economic growth vis-a-vis the fast complex systemic interactions in a globalised economy, the development is a laudable demonstration of strategic sensitivity.
Strategic sensitivity, according to Yves Doz, Professor of Strategy at INSEAD, ‘’is the sharpness of perception and attention. It is the capabilities for continuous changes and seeing and framing opportunities in insightful ways.’’ It is one of the components or enabling capabilities of the modern concept of fast strategy.
The financial system, broadly segmented into the money and capital markets and consisting of financial institutions, financial products and financial markets is generally accepted as the lifeblood of the economy, the reason it appears to be the most regulated by government and its agencies to ensure stability.
Financial system instability is detrimental to the economy and is caused by multiple factors with complex dynamics such as, global imbalances, market liberalisation, under regulation/ supervision, poor macroeconomic policies, poor corporate governance, insufficient transparency, moral hazards and irrational exuberance.
Others factors include, liquidity mismatch, non-performing loans, fall in asset prices, equity markets, detrimental exchange rate regimes , complex risks, such as credit risk, interest rate risk, exchange rate risk and contagion, and information asymmetries. The power of information in driving growth in the financial system is immense.
Reports show that banking crisis occur on average once every 20 to 25 years and that the annual probability of a crisis is 4-5 per cent, and that higher capital base and liquidity requirements reduces rate of failure. It is the duty of central banks worldwide to ensure financial system stability but regulatory agencies around the world became more strategically sensitive in the aftermath of the 2008-2009 global financial crisis. They have become more concerned about the architecture of international financial system and more alert to recognise changes in the global terrain and act fast as appropriate.
The domino effect of the crisis around the world brought to the fore the pitfall of globalisation which has broken down geographical barriers and presents a common platform for the operation of unequal partners (advanced and developing economies).
Globalisation heightened competition among markets and economies, and with the changing perspectives, it harbours potential threats capable of triggering systemic crisis, thus the need for regulatory agencies to be agile and innovative.
As Harvard economist, Dani Rodrik, noted, ‘’the expansion of globalisation and free movement of capital flows are the reasons why economic crisis have become more frequent in both developing and advanced economies alike.’’
CBN places financial system stability on the front burner, and as Emefiele remarked, ‘’the 2008-2009 global financial crisis necessitated the development of adequate framework and appropriate tools for managing financial stability, particularly macro-prudential and microprudential policies and crisis management conundrum.’’
In his maiden press briefing, the apex bank governor noted that the core of his vision was to effectively manage potential threats to financial stability and create a strong governance regime that would be conducive for financial intermediation, innovative finance and inclusiveness.
He said, ‘’in this regard we hope to anchor on two main pillars: managing factors that create liquidity shocks and zero tolerance on practices that undermine the health of financial institutions.’’
Also, his predecessor, Sanusi Lamido Sanusi (now Emir of Kano), anchored his blue print on four cardinal objectives, namely, establishing financial stability, enhancing the quality of banks, ensuring banking sector contributes to the real economy and enabling solution evolution.
Earlier, prior to the 2008-2009 global financial crisis, the apex bank under Professor Chukwuma Soludo evolved the Nigerian Financial System Strategy FSS2020 to enhance stability of the financial system. FSS2020 was strategic, futuristic and pre-emptive as it were. It fortified the banking system ahead of the 2008-2009 fiasco and largely cushioned the devastating blow the global crisis would have dealt on the Nigerian banking system.
The policy resulted in the emergence of twenty five strong banks with larger capital base from the previously existing eighty nine banks and sixteen of the twenty five new banks joined the league of the top world 100. Nigerian banks were rated by international rating agencies such as Standard and Poor’s (S&P) and Fitch for the first time, even as non-performing loans dropped from 23 per cent to 7 per cent.
But, the capital market was not as lucky. The crisis largely contributed to the destabilisation of the market because of its (the capital market) intrinsic nature and operating dynamics. Having built a bubble over time, the market got triggered which led to herding and a massive outflow of speculative funds from the market by both foreign portfolio investors and local investors which resulted in drastic fall in share prices. In the US, the 2008-2009 global financial crisis resulted in the loss of 8.7million jobs, foreclosure of 15 million homes, collapse of some giant financial institutions hitherto considered too big to fail, and wiped out $2.8trillion savings. It led to the evolution of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (Dodd-Frank Act), which aimed to prevent another financial crisis, protect consumers, rein in Wall Street and big bonuses, end bailouts and too big to fail, create sound economic foundation to grow jobs.
A robust financial system has three basic characteristics, namely flexibility, resilience and internal stability. Among other benefits, it facilitates the smooth flow of funds from surplus to deficit ends, engenders macroeconomic stability which enables businesses to plan conveniently and attracts foreign capital for the greater benefit of the economy.
Recent CBN policies on the foreign exchange market have enhanced public confidence inflow of more foreign capital into the economy. Data from the National Bureau of Statistics show that the total investment inflows into Nigeria peaked at US$1.7923 billion in Q2 2017, US$884.1 million higher than Q1 2017, representing 95 per cent increase. And the year-on-year inflow, rose to 43.6 per cent from US$1,042 million same period in 2016. Foreign portfolio investment was noted as the main driver of the inflows.