NDIC lists ways to prevent banks’ distress

The Nigeria Deposit Insurance Corporation (NDIC) has reiterated that timely and effective resolution of issues leading to distress in banks is imperative to maintaining the banking system’s stability.
The corporation which is responsible for preventing bank depositors from losing their monies however emphasised that the success of any resolution option depends to a large extent on how promptly the problem of the bank is identified and addressed by the bank and the regulators.

NDIC has paid over N1.6b to over 40,000 depositors of recently failed banks besides over N45.4b paid in June 2023 to depositors of 20 banks that collapsed with another N16b liquated dividend waiting to be paid.

While presenting a paper on recent developments in banks distress resolution: Lesson for Nigeria, NDIC’s Deputy Director, Bank Examination Department, Daniel Udechukwu, during the 20th edition of the NDIC Finance Correspondents Association of Nigeria (FICAN) Workshop in Owerri, Imo state on Wednesday, noted that industry players, regulators, and supervisory agencies must pay attention to causes to put in place preventive mechanisms.

According to him, internal factors that contribute to banks’ failure are mostly linked to failures arising from banks’ policies; weak risk management; weak credit policies; connected lending and insider loans; credit concentration; loan/deposit mismatch.

Others are ineffective and inadequate recovery optimistic assessment of borrower’s prognosis, ability, and/or character; weak human resource and capacity, among others.

Failures arising from banks’ operations are also fast means to distress in banks where Laissez-faire credit review procedures; failure of information technology; ineffective; and poor strategic planning and implementation are rampant.

Given the above, Udechukwu noted that to avoid banks going into distress that might lead to a collapse which may in turn impact heavily on the industry and the nation’s economy, several steps must be taken and not in isolation from each other which includes the need to strengthen the resolution and recovery plan framework to include all banks and not only D-SIBs.

Noting that basic risk management practices and governance arrangement must be ensured, Udechukwu added: “The first and most important source of operational and financial resilience lies in the bank’s own risk management and governance arrangement.

“The need for Supervisors to robustly assess banks governance and risk management practices as well as ensure strong supervisory approach for liquidity risk management. To stem distress in domestically systemically important banks (D-SIB), there is a need for public sector support to ensure financial stability and to protect the economy.

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“The need for supervisors to continually and comprehensively assess the viability/sustainability of banks’ business models. Supervisors to proactively engage with outlier banks. Supervisors should assess the impact of changes in the external environment on banks.

“Supervisors should assess banks’ business models in a forward-looking manner, taking into account potential changes in their operating environment over a medium/long term

“Liquidity risk supervision needs to be enhanced in the light of recent experience. Specific features of a bank’s business model or asset/liability structure should be adequately taken into account, both by the bank and by the supervisory authorities in liquidity risk management.

“Liquidity stress testing conducted by banks should be supplemented by supervisory stress testing of liquidity. Banks should have sufficient tools to ensure appropriate action to remediate supervisory concerns concerning liquidity risk liquidity risk management and funding profile.

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“They should ensure that the tools can be deployed sufficiently quickly. Rules-based approach on its own is unlikely to appropriately identify, assess, and allow the timely mitigation of key risks to a bank’s safety and soundness, and broader financial stability. It should be complemented by supervisory authorities exercising judgments.

“Supervisory authorities to review the supervisory toolkits to ensure they are sufficient to drive concrete actions on banks. There is a need for timely and effective cross-border supervisory cooperation to ensure global financial stability. There is a need to monitor and manage risks at both consolidated group and legal entity levels.

“The need for supervisory authorities to take into account possible limitations in transferring capital and liquidity resources within banking groups, which may arise from national laws, supervisory approaches or banks’ internal managerial practices.

“The liquidity regulations alone cannot prevent all liquidity runs on banks in an age characterized by easy access to information as well as banking services via various digital tools.”