The banking-sector crisis and conspiracy theories (II)
Friday 25 September 2009
Lamido has stated in unequivocal terms the state of our banks which is the result of some regulatory and supervisory gaps.
He has also gone ahead to intervene in some bankswhich in his opinion have cholera. He does not want the cholera to be widespread and despite the curiosity of many, he felt there was no need to conduct a proper test of cholera on all before taking a decisive action of such significant dimension. What were the options open to Lamido?
Liquidity strain is the great catalyst of the present banking crisis. Soon after the consolidation of banks in 2007, many Nigerian banks were awash with liquidity, business outlook looked very good and many foreign investors were eager to invest in banks.
Many of them raised funds at the international markets just before the global economic meltdown.
The CBN looked on without considering the implication on money supply. Characteristic of the mentality of an average banker, banks looked for avenues to deploy this excess liquidity.became very aggressive in lending which is considered a very easy avenue for increasing revenue and maintaining a lead in the industry's unhealthy competition landscape without considering the risk. Some banks used short-term funds to finance long-term assets, and all this created a serious liquidity strain which undoubtedly threatened the safety of the industry.
This is another way of saying the bubbles that were created by both the central bank and the other banks eventually popped.
The visibility of this popping became more apparent during a time of global credit crunch when the foreign investors had to repatriate their investments.
Decisive measures were not taken until after the crisis had reached a critical point.
The central bank did not recognise the problem soon enough, and only when a major crisis emerged and banks stopped lending to each other as expected, did it take steps to solve the problem by creating the Expanded Discount Window (EDW).
The EDW policy assumed that the liquidity strain of some banks or the industry in general was a short-term thing.
The CBN did not at any time compute the volume of foreign capital that came in and how much has left, it did not compute the potential loss facing banks as a result of loss of the value of assets they funded through the capital market and attempt to extrapolate their capital impairment.
If the sums had been done, it would have been clear how much the industry requires and an appropriate strategy fashioned out. From the various comments of the CBN governor, one can clearly deduce that the major ailment of the banks is the bad risk asset (loans) they carry in their books.
This may also have led to the desperation of some banks to doctor reports sent to the regulator.
It is very normal in banks worldwide to see risk assets go bad. There is a measure of risk attached to lending money, and it has never been a criminal offence to lend or borrow money.
It is what banks live on. It is this lending activity that ensures the economy grows, people are employed and the standard of living improves.
That is why the US government, like governments in other developed economies, feels concerned when banks stop lending.
It can be likened to stopping the flow of blood in the system. It is however the dimension of these bad loans that has given the governor a lot of concern, just as it should for any discerning mind.
When a loan goes bad, the implication is that a bank has to write it off from its profit, and if the profit is not sufficient, then it is charged to the capital of the bank. This literally means the shareholders will bear the loss. From the statistics released so far, some of the banks have such huge bad loans that may have completely eroded their capital.
This does not however mean that the depositors of the banks have lost their money.
Proactive regulators make efforts to protect the depositors as the deposits are insured, even though there is a lot of room for improvement in the amount insured in Nigeria. It is speculated that huge bad loans is an industry-wide problem.
One of Lamido's concerns, therefore, is the heavy credit losses CBN has identified in the banks which have impinged on their capital.
Typically, when banks or any going concern are found to be capital-deficient, the natural thing to do is for the authorities to encourage them to carry out re-structuring and raise additional capital from private investors.
This is exactly what is being done today in many countries. In the peak of the global financial crisis in the United States, the Federal Reserve System (FED) released a vague summary of the results of the so-called stress test that was placed on the 19 largest banks.
There were a few details released to the public about which banks are in what degree of trouble, but the FED stated clearly the banks that must be recapitalised by private investors.
The FED did not tell everybody how badly these banks needed this recapitalisation; for fear that the money would not be forthcoming, the banks would be priced cheaply and depositors would move their hard-earned monies from such banks.
This is a US economy where the average level of public enlightenment can be assumed to be higher than that in Nigeria. The FED identified the need to protect the confidence that the banking public has in the system.
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