Bank failure is the closing of an insolvent bank by Regulatory Authorities. One important statutory mandate of the NDIC is to ensure that failing and failed insured institutions are resolved in a timely and efficient manner. That requires the existence of legal powers that support early intervention and prompt corrective action, the ability to close troubled banks promptly, and legal provisions for the swift and orderly liquidation of assets and resolution of creditors’ claims.
The Corporation is empowered to provide financial and technical assistance to failing or distressed banks in the interest of depositors. The financial assistance can take the form of loans, guarantees for loans taken by the bank or acceptance of accommodation bills. This could occur when the bank in question has become insolvent or because it no longer has enough liquid assets to fulfill its payment obligations. When a bank is illiquid and insolvent it is assumed to have failed.
The NDIC’s responsibility for failure resolution is shared with the CBN. Section 34 of BOFIA requires CBN to turn over significantly or critically under-capitalised banks to NDIC for distress resolution while NDIC is required to recommend the revocation of licenses of terminally distressed banks to the CBN (S.36). NDIC’s mandate as a liquidator is contingent on revocation of a banking license by the CBN.
In that regard, NDIC had in the last two decades worked closely with CBN in resolving failures in the banking System. The Framework Page | 113 for Contingency Planning for Banking Systemic Distress and Crisis issued in 2003 (replaced in 2011) by the NDIC and CBN facilitates prompt resolution of problem banks. The framework reduces the incidence of systemic distress by improving the supervisory processes, providing transparent and objective thresholds for regulatory intervention and promoting self-regulation among banks.