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, 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 N1.6 billion to over 40,000 depositors of recently-failed banks besides over N45.4 billion paid in June 2023 to depositors of 20 banks that collapsed, with another N16 billion liquidated 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, 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 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 Domestically Systemically Important Banks (D-SIBs).

Saying 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 on the banks’ own risk management and governance arrangement.

“There is 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 D-SIB, there is a need for public sector support to ensure financial stability and to protect the economy.

“There is the need for supervisors to continually and comprehensively assess the viability/sustainability of banks’ business models, and for 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.

Udechukwu further said 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.

He also said liquidity stress testing conducted by banks should be supplemented by supervisory stress testing of liquidity, adding that banks should have sufficient tools to ensure appropriate action to remediate supervisory concerns with respect to liquidity risk management and funding profile.

“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 with supervisory authorities exercising judgments. Supervisory authorities should review the supervisory toolkits to ensure they are sufficient to drive concrete actions on banks,” the NDIC Deputy Director added.

Continuing, he stated: “There is a need for timely and effective cross-border supervisory cooperation to ensure global financial stability, monitor and manage risks at both consolidated group and legal entity level.

“The is 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”.

(The Nation)

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