KEY NOTE ADDRESS BY HAJIYA YABAWA WABI MINISTER OF STATE FOR FINANCE AT THE OPENING SESSION OF THE WORKSHOP ON RESOLUTION OF PROBLEM BANKS ORGANISED BY AFRICA REGIONAL COMMITTEE OF IADI AT TRANSCORP HILTON HOTEL ABUJA FROM MAY 9TH TO 13TH 2011
PROTOCOL
1.0 I am delighted to address this international gathering today. Let me start by commending the organizers for choosing the topic for this workshop. The topic is critical to the effectiveness of Deposit Insurance System (DIS). The topic is of great relevance to all member countries as it has become one of the popular options being adopted in the resolution of problem banks.
2.0 I wish to start by noting that banks can and do fail. Because of the negative effects of bank failures, virtually all countries are seeking to strengthen the existing mechanism for dealing with failing or failed deposit-taking financial institutions. In this regard, the overriding concern is promoting financial system stability. As practitioners, I believe that you are aware that certain aspects of failure resolution mechanisms are country-specific and reflect public-policy objectives and mandate. I therefore urge you to bear this in mind in the course of your deliberations.
3.0 At this juncture, I consider it appropriate to comment briefly on the recent Nigerian experience with failure resolution. As you might be aware, the Federal Government of Nigeria introduced a Banking Sector reform programme in July 2004 which fixed the minimum regulatory capital (i.e. shareholders fund) at =N=25 billion (approximately US$190 million). The increased capitalization requirement induced mergers and acquisitions as well as consolidation of the banking industry. At the conclusion of the Bank Consolidation Programme in December 2005, 25 bigger and better capitalized banks emerged while 13 banks that failed to attain the new capital requirement had their licences revoked on 16th January 2006 and became candidates for failure resolution.
4.0 Following the revocation in 2006 of the operating licences of 13 banks that failed to attain the prescribed minimum capitalization of N25 billion by the end of 2005 and the guarantee of full coverage to the private sector depositors offered by the Federal Government, the NDIC implemented the novel approach of resolving bank failure through Purchase and Assumption (P&A) mechanism.
5.0 It is worth noting that the option of Purchase and Assumption was based on public policy considerations which included giving depositors easy access to their money, to aid continuity in banking in same premises used by the failed banks, promote banking culture which is critical to savings and mobilization for economic development and to generally improve public confidence in the financial sector of the economy
6.0 As at 31st December 2010, P&A arrangements had been concluded for eleven (11) out of the 13 banks closed in 2006. The 11 banks are those which the NDIC had obtained winding-up orders from the court. The private sector deposits and some of the assets of the closed banks were acquired by various healthy banks.
7.0 The Purchase and Assumption as a resolution option was confronted with many challenges. The challenges include litigations by the erstwhile shareholders/directors of some of the failed banks. As of today, 2 of the 13 banks are still pending before the Federal High Court. The key issue raised by NDIC’s experience is the need for the legal system to be supportive of timely and effective resolution of bank failures. However, it is gratifying to note that the new NDIC Act 2006 has enhanced the legal framework for failure resolution in Nigeria.
8.0 Another major challenge which emerged from the recent bank consolidation relates to the disposal of risk assets of failed banks. Under the P&A strategy adopted for the resolution of the failed banks, the prospective acquiring banks have shown interest mainly in the deposit liabilities and the branch network of the failed banks with a disposition to avoiding their risk assets. Hence, the disposal or realization of the risk assets remains a daunting challenge for the NDIC (the Liquidator). This is a matter of concern given the poor quality of the risk assets. However, the realization of the risk assets is critical to the reimbursement of public-sector depositors and other creditors of the failed bank.
9.0 I note with satisfaction that the International Association of Deposit Insurers (IADI) has issued a General Guidance for the Resolution of Bank Failures. When dealing with bank failures, I urge you to always have at the back of your mind, the need to promote financial system stability as well as sustain public confidence in the banking system. Furthermore, it is imperative that your choice of failure resolution methods should be guided by financial stability considerations rather than sole reliance on the least cost considerations. In cases where you adopt depositor reimbursement, it is important to ensure that pay-out is timely and efficient.
10.0 Conducting P&A transaction requires expertise and knowledge. Given the array of deposit insurance experts invited to make presentations at this workshop, I am confident that the issue and challenges associated with a successful conduct of a P&A transactions will be adequately addressed. It is my hope that pragmatic recommendations will flow from your deliberations and I look forward to the communiqué that will be issued at the end of the workshop.
11.0 I wish to commend NDIC for hosting this workshop and for its active participation in IADI’s activities. I believe that events of this nature will facilitate knowledge transfer, capacity building as well as sharing of experience amongst practitioners.
12.0 In conclusion, I urge all participants to make constructive contributions. I further urge participants to find time to appreciate the beauty and serenity of Abuja, the capital city of Nigeria.
13.0 I wish you all fruitful deliberations and I thank you for your attention.
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