BANK FAILURE RESOLUTION IN NIGERIA: THE BRIDGE BANK OPTION

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BANK FAILURE RESOLUTION IN NIGERIA THE
BRIDGE BANK OPTION

• Being Paper Presented
• at the
• Workshop for Business Editors and Finance
  Correspondents Association of Nigeria (FICAN)
• at
• Manpower Development Institute, Dutse,
• Jigawa State
• Adeleke A. A.
• Director
• Asset Management Department, NDIC

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OUTLINE

• Introduction
• Applicable Failure Resolution Options
• Rehabilitation
• Deposits Pay-out
• Insured Deposits Transfer and
• Purchase and Assumption (PA)
• Bridge Bank Mechanism
• Why Adopt Bridge Bank Mechanism?
• Public Reaction / Challenges

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INTRODUCTION

• Effective resolution is a series of systematic
  action designed to end a banks distressed
  condition.
• Focus of a good resolution option
• Maintains public confidence and stability in the
  banking system.
• Ensures fairness, equity, transparency and
  accountability.
• Instills market discipline while discouraging
  moral hazards.
• Achieves minimum disruption to payment system.

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INTRODUCTION

• Speedy payment to insured depositors and quick
  realization of assets for the benefits of
  uninsured depositors and creditors.
• Minimize the likelihood of having to bail-out
  uninsured depositors and creditors.
• A typology of problem banks
• Illiquid but solvent
• Insolvent but liquid
• Illiquid and insolvent.

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RESOLUTION OPTIONS

• Rehabilitation
• Financial Assistance (Accommodation Facility).
• Imposition of Holding Actions.
• Change in Management.
• Take-Over of Control Management.
• Acquisition Sale of Banks.
• Deposit Payout
• Insured Deposits Transfer
• Purchase and Assumption (PA)
  

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EXPERIENCE SO FAR

• REHABILITATION
• Take-Over Of Control
• 1 Bank in 1992
• 5 Banks in 1993
• 16 Banks in 1995
• 1 Bank in 1996
• 1 Bank in 1999
• Sale of Banks
• 7 banks sold to new investors.

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EXPERIENCE SO FAR - BANK
FAILURE AND EXTENT OF FAILURE IN NIGERIA BETWEEN
1994 AND 2006
Year of Closure No of Banks Total Assets(NB) Total Deposits (NB) Ratio of Assets of Close Banks to Total Assets of Banks Ind() Ratio of Assets of Close Banks to Total Deposits of Banks Ind() Ratio of Assets of Close Banks to GDP() Number of Depositors
1994 4 6.10 2.00 1.94 1.12 0.66 6,411
1995 1 0.40 0.80 0.09 0.38 0.02 7,416
1998 26 34.60 16.30 4.50 4.34 1.11 1,709343
2000 3 2.70 3.80 0.14 0.45 0.06 31,969
2002 1 20.20 11.60 0.68 0.95 0.35 228,585
2003 1 2.10 3.41 0.06 0.24 0.03 1,044
2006 13 160.10 177.28 1.23 4.69 0.55 961,211
TOTAL 49 165.9 215.19 0.93 2.59 0.44 3,165,979
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KEY STATISTICS TO CONSIDER

• Significance of the Recent Banking Crisis
• Total Deposits of Banks in the System N11.371
  trillion.
• Eight (8) Intervened Banks Total Deposits
  N2.984 trillion.
• Three (3) Bridge Banks Total Deposits N816.29
  billion.
• NDICs Risk Exposure N567.95 billion as against
  DIF of N353.06 billion.
• Total Deposits of Forty-nine (49) Banks Closed
  prior to August, 2011 N215.19 billion.

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KEY KEY STATISTICS TO CONSIDER (Cont
(Contd)

• Total Assets of Banks in the System N16.542
  trillion.
• Total Assets of the 8 intervened banks N3.950
  trillion.
• Total Assets of the 3 Bridge Banks N895
  billion.
• Total Recapitalization required by 8 intervened
  banks N1.638 trillion.
• All Figures as at 31st May, 2011.

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BRIDGE BANK MECHANISM

• A new bank created to acquire assets and assume
  liabilities of the failed bank. It is a
  variation of PA.
• New bank could be privately owned or the
  government could create it for the purpose.
• If government owned, it could be operated for
  about 2 years after which it would be sold to
  fresh investors.
• Merits
• Avoid losing the failed bank thus protecting jobs
  and continuing banking services to the community.

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BRIDGE BANK MECHANISM (Contd)

• All shareholders would lose their investments.
• All depositors and creditors would be covered and
  that would engender public confidence in the
  banking system.
• Demerits
• Undermines market discipline as it encourages
  moral hazard.
• It could be costly.
• The bridge bank could fail thus postponing the
  evil day and aggravating the cost of
  resolution.

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IA22 OUTCOME OF IADIs SURVEY

• To maintain daily operations of a failed bank.
• When number of failed institutions is very large
  and the failures occurred during a short period
  of time.
• In cases where the Liquidator is reluctant to
  proceed with formal liquidation because either
  the failed bank is too large (so no adequate
  funds are available for reimbursement) or there
  is not enough time to market the banks assets to
  potential acquirers.
• Bank with an attractive franchise is in danger of
  failing before acquirers can be found.

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WHY NDIC ADOPTED BRIDGE BANK MECHANI
MECHANISM

• Provided for in Section 39(1) of NDIC Act, 2006.
• The 3 affected banks had attractive franchise and
  deterioration in their assets would hamper their
  sale.
• Depositors were protected thus promoting
  confidence in the system by ensuring continuity
  of banking services.
• Outright liquidation would have had dire
  consequences on depositors other stakeholders.
• The most cost effective option considering the
  size of the 3 banks, volume of deposits and
  number of their employees.

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P PUBLIC REACTION / CHALLENGES

• Minimal or no panic withdrawals by depositors.
• Market acceptance of assurance by Regulatory
  Authorities that all deposits were protected.
• Some stakeholders felt measure taken was
  preferable to outright liquidation.
• Delicate process of incorporating shelf companies
  that became Bridge Banks.
• Court action by erstwhile shareholders.
• Cumbersome, slow and bureaucratic judicial
  process.

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WRAP UP

• THANK YOU FOR LISTENING!