Reconciling Banking Regulation and the ‘Systemically Important Banks’ Syndrome: Deconstructing the Legal Constraints from a Nigerian Perspective
DOI:
https://doi.org/10.25159/2522-6800/2956Abstract
Banks occupy a central position in the financial architecture of any economy due to their financial intermediation roles and as facilitators of the national payments system. However, because of the peculiarly risky nature of their business, banks do fail. Among other outcomes, this can have grave repercussions for various stakeholders, especially depositors. To overcome these challenges and ensure that the banking system remains efficient, transparent, strong and stable, banking regulators apply various administrative and statutory measures. A major influential factor in seeking to keep distressed banks afloat is the ‘systemically important banks’ syndrome that nudges regulators to expend public funds in bailing out large insolvent banks because of their strategic position in the financial system and the potentially traumatic systemic implications of their failure and liquidation. The foremost tool in the pursuit of this objective is the now globally acknowledged failure-resolution policy of bank bailout. Here, regulators are unduly influenced by the ‘too big to fail’ phenomenon; they therefore reason that some banks are too big and are therefore too systemically important to be allowed to fail, hence the deployment of public funds to bail them out when they are in distress. This article considers the dilemma of banking regulators in pursuing the protection of depositors, on the one hand, and seeking to keep big distressed banks afloat at the expense of public resources, on the other. This objective is particularly pursued from the perspectives of the Nigerian jurisdiction. The article advances the view that the ‘systemically important banks’ syndrome may not be the most effective means of driving banking regulation because of the question of moral hazard involved. It proffers alternative measures for attaining the crucial outcome of effective banking regulation.
Metrics
References
Abioye O, ‘AMCON to sell Enterprise, Mainstreet Banks October’ Punch (26 February 2014) 1.
Abioye O, ‘Economic Crisis: Five Banks’ Profits Drop by N54 bn’ Punch (18 April 2016) 1.
Aderinokun K, Chima, O and Abiodun, E, ‘Eight Systemically Important Banks to raise Liquidity Ratio to 35%’ ThisDay (14 November 2013) 1.
Adeyemi B and Olowu, AO, ‘Corporate Governance: Has the Nigerian Banking Sector Learnt Any Lesson?’ (2013) International Journal of Business and Social Research 49 at 56.
Afolabi JA, ‘Mergers and Acquisitions in the Nigerian Banking System: Issues and Challenges’ paper presented at the workshop for the Business Editors and Finance Correspondents Association of Nigeria at the Manpower Development Institute, Dutse, Jigawa State on 28–29 November 2011, 3 <http://www.ndic.gov.ng/files/challenges> (accessed 25 November 2016).
Agabi C, ‘That Marriage between Heritage, Enterprise Banks’ (Daily Trust 31 August 2015) <http://www.dailytrust.com.ng/news/business/that-marriage-between-heritage-enterprise-banks/108721.html> accessed 30 December 2016.
Allen F and Carletti E, ‘What is the Rationale for Regulating Banks?’ (2007) Banking and Finance Monitor 40 at 45 <http://www.finance.wharton.upenn.edu/allenf/download/Vita/banking%20finance%20monitor%20article.pdf> accessed 8 December 2016.
Alli Y and Ikhile E, ‘Cecilia Ibru Jailed 18 Months … forfeits N190bn’ The Nation (9 October 2010) 1.
Aremu JA, ‘Lessons of Financial Sector Regulatory Reforms and Challenges of Real Sector Financing: A Regional Perspective’ (2010) Economic and Financial Review 127 at 129.
Basel Accords (Basel 1, Basel 2 and Basel 3) the BCBS, visit the BIS site .
Baxter R, ‘The Global Economic Crisis and Its Impact on South Africa and the Country’s Mining Industry’ <https://wwww.resbank.co.za/Lists/News%20Publications/Attachments/51/Roger+Baxter.pdf> accessed 8 December 2016.
Beamish T, ‘Failed Bank CEO jailed for Eight Years’ (Moneyweb 1 October 2013) <http://www.moneyweb.co.za/archive/failed-bank-ceo-failed-for-eight-years> accessed 18 December 2015.
Blair CE, Carns, F and Kushmeider, RM, ‘Instituting a Deposit Insurance System: Why? How?’ (2006) Journal of Banking Regulation 1 at 4.
Bonorchis R, ‘African Bank Failure Prompts Regulator to review Supervision’ (Bloomberg 2015) <https://www.bloomberg.com/news/articles/2015-05-26/african-bank-s-failure-prompts-regulator-to-review-supervision> accessed 3 January 2017.
Bonorchis R, ‘Nigerian Banking Industry seen in “Full Blown†Credit Crisis’ (Bloomberg 10 October 2016) <https://www.bloomberg.com/news/articles/2016-10-10/nigerian-banking-industry-seen-in-full-blown-financial-crisis> accessed 2 January 2017.
Bordo MD and Schwartz A, ‘The Performance and Stability of Banking Systems under “Self-regulationâ€: Theory and Evidence’ (1995) Cato Journal 453 at 455.
Brand R and Khanyile N, ‘African Bank Contagion sweeps from Lenders to Sovereign’ (Bloomberg 2014) <https://www.bloomberg.com/news/articles/2014-08-21/african-bank-contagion-sweeps-from-lenders-to-sovereign> accessed 3 January 2017.
Busch A, ‘Divergence or Convergence? State Regulation of the Banking System in Western Europe and the United States’ (2002) Paper delivered at the Workshop on Theories of Regulation at Nuffield College, Oxford, 25–26 May 2002 <http://www.ox.ac.uk/politics/papers> accessed 21 July 2014.
Carrasco ER and Williams S, ‘Emerging Economies After the Global Financial Crisis: The Case of Brazil’ (2012) Northwestern Journal of International Law and Business 82 at 109.
Cartwright P and Campbell A, ‘Co-insurance and Moral Hazard: Some Reflections on Deposit Protection in the UK and USA’ (2003) Journal of Banking Regulation 9 at 20.
CBN’s Regulation on the Scope of Banking Activities and Other Ancillary Matters (No 3) 2010, which repealed the Guidelines for the Practice of Universal Banking in Nigeria; and the Central Bank of Nigeria Scope, Conditions & Minimum Standards for Commercial Banks Regulations 2010.
<https://www.cbn.gov.ng> accessed 3 May 2017.
CBN, Through the instrumentality of the Regulation on the Scope of Banking Activities and Other Ancillary Matters (No 3) 2010.
CBN circular with reference number BSD/DIR/COB/LAB/07/026 (5 September 2015) on the framework for the regulation and supervision of domestic systemically important banks (SIBs) in Nigeria <https://www.cbn.gov.ng/out/BSD/Approved%20Supervisory%20framework%20.pdf> accessed 3 January 2017.
Central Bank of Nigeria, ‘Public Statement on the Recapitalisation of Eight Banks’ <https://www.cbn.gov.ng/out/2011/pressrelease/...pdf> accessed 17 August 2017.
Central Bank of Nigeria Scope, Conditions & Minimum Standards for Commercial Banks Regulations 2010.
Chiezey U and Onu AJC, ‘Impact of Fraud and Fraudulent Practices on the Performance of Banks in Nigeria’ (2013) British Journal of Arts and Social Sciences 12 at 28.
Chu KH, ‘Deposit Insurance and Banking Stability’ (2011) Cato Journal 99 at 106
Claessens S and Kodres L, ‘The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions’ (2014) IMF Working Paper 2 <https://www.imf.org/enternal/pubs/ft/wp/2014/wp1446.pdf> accessed 12 December 2016.
Diamond DW and Dybig PH, ‘Bank Runs and Deposit Insurance and Liquidity’ (2000) Federal Reserve Bank of Minneapolis Quarterly Review 14 at 15
Dick DL, ‘Confronting the Certainty Imperative in Corporate Finance Jurisprudence’ (2011) Utah Law Review 1461 at 1467.
Donnelly L, ‘African Bank: The Rot stops Here’ (Mail & Guardian 2014) <http://mg.co.za/article/2014-09-04-african-bank-the-rot-stops-here> accessed 3 January 2017.
Driesen DM, ‘Legal Theory Lessons from the Financial Crisis’ (2014) The Journal of Corporation Law 55 at 68.
Dolan D, ‘South African Central Bank to Oversee $940 million Abil Rescue’ (Reuters 10 August 2014) 1 <http://www.uk-reuters.com/article/uk-safrica-african-bank-inv-dUKKBNOGAOR320140810> accessed 3 January 2017.
Egbo OP, ‘Universal Basis of Bank Failure – the Nigeria Case’ (2010) Developing Country Studies 119 at 120.
Ebong B, ‘The Banking Industry and the Nigerian Economy Post-consolidation’ (2005) Union Digest 1 at 2.
Egboro EM, ‘The 2008/2009 Banking Crisis in Nigeria: The Hidden Trigger of the Financial Crisis’ (2016) British Journal of Economics, Management and Trade 1 at 2.
Eichengreen B, ‘Greek Debt Crisis: Lessons in Hindsight’ (The Guardian 14 June 2013) 1 <http://www.theguardian.com> accessed 3 September 2014.
Ely B, ‘Regulatory Moral Hazard: The Real Moral Hazard in Federal Deposit Insurance’ (1999) The Independent Review 241 at 242.
FDIC, ‘Federal Deposit Insurance Corporation – Analysis of Failed Banks’ <http://www.fdic.gov/bank/individual/failedbanklist> accessed 7 December 2016.
Federal Deposit Insurance Corporation Report <https://www.fdic,gov/bank/individual/failed/banklist> accessed 7 December 2016.
Gabriel O, ‘Analysis: The 8 Rescued Banks run Similar Risk’ (Vanguard 9 August 2011) <http://www.vanguardng.com/2011/08/analysis-the-8-rescued-banks-run-similiar-risk/>.
Garten HA, ‘Regulatory Growing Pains: A Perspective on Bank Regulation in a Deregulatory Age’ (1989) Fordham Law Review 501 at 503.
Gadanecz B, Tsatsaronis, K and Altunbas, Y, ‘Spoilt and Lazy: The Impact of State Support on Bank Behaviour in the International Loan Market’ (2012) International Journal of Central Banking 121 at 163.
Gilbert E, Calitz E and Du Plessis S, ‘Prudential Regulation, Its International Background and the Performance of the Banks – a Critical Review of the South African Environment since 1970’ (2009) South African Journal of Economic History 43.
Gordhan P, ‘A Safer Financial Sector to serve South Africa Better’ (National Treasury Policy Document, 2011) <http://www.treasury.gov.za/twinpeaks/20131211%20...to%20serve%South%20Africa%20better.pdf> accessed 15 December 2016.
Gonzalez H, ‘Towards Deposit Insurance Reform’ (1991) Washington University Law Review 665 at 668.
Gunay NE and Gunay G, ‘Potential Insolvency, Prudential Regulation and Supervision in Emerging Market Banking Systems: The Case of Turkey’ (2007) International Journal of Liability and Scientific Enquiry 161 at 168.
Gunnarsson E, ‘The Icelandic Regulatory Responses to the Financial Crisis’ (2011) European Business Organization Law 1 at 39.
Habu K, ‘Deposit Insurance Scheme: Pillar for Financial Safety-net’ ThisDay (19 May 2013) 1.
Hall JB, ‘Bank Bailout Mark II: Will it Work?’ (2009) Journal of Banking Regulation 215 at 216.
Hassan BI, ‘Deepening Deposit Insurance in Nigeria’ Sunday Trust (11 November 2012) 1.
Head JW, ‘Lessons from the Asian Financial Crisis: The Role of the IMF and the United States’ (1998) Kansas Journal of Law & Public Policy 70 at 71.
House of Lords Select Committee on Economic Affairs ‘Banking supervision and regulation’ Volume 1: 2nd Report of Session 2008–2009, (June 2009) 10 <https://www.publications.parliament.uk/pa/ld200809/ldselect/ldeconaf/101/101i.pdf> accessed 7 March 2017.
IADI, ‘Charting a Course through a Global Crisis’ International Association of Deposit Insurers 2008/2009 Annual Report.
Komolafe B, ‘Afribank & Co: AMCON Acquires Bridge Banks, Injects N679bn’ Vanguard (2011) 1.
Kaufman GG, ‘Bank Runs, Causes, Benefits and Costs’ (1988) Cato Journal 559 at 560.
King RG, ‘Central Banking in an Open Economy’ (2012) International Journal of Central Banking 167 at 168.
Kleftouri N, ‘Meeting the Rationale of Deposit Protection System’ (2014) Journal of Financial Regulation and Compliance 300 at 317.
Kulms R, ‘Private Creditors and Sovereign Default: From Argentina to Greece’ (2012) Belgrade Law Review 65 at 67.
Kuye OI, Ogundele OJK and Otike-Obaro A, ‘Government Bailout of Distressed Banks in Nigeria: A Justifiable Strategy?’ (2013) International Journal of Business and Social Science 174 at 180.
Labonte M, ‘Systemically Important or “Too Big to Fail†Financial Institutions.’ Congressional Research Service Report submitted to the US Congress on 30 June 2015 <https://www.fas.org/sgp/crs/misc/R42150.pdf> accessed 12 December 2015.
Laeven L, ‘Bank Risk and Deposit Insurance’ (2002) World Bank Economic Review 109 at 110.
Madukwe B and Nwopoke M, ‘EFCC re-arraigns Ebong, ex-Union Bank MD, others’ Vanguard (16 November 2012) 1.
Mbutor OO and Yilkudi DJ, ‘The Recent Financial Crisis and the Special Financing Interventions by the Central Bank of Nigeria: Implications for the Real Sector of the Nigerian Economy’ (2011) The Bullion 44 at 45.
Meyer LH, ‘The Challenges of Global Financial Institutions Supervision’ (2000) BIS Review 1 at 2.
Milne A and Wood G, ‘Shattered on the Rock? British Financial Stability from 1866 to 2007’ (2009) Journal of Banking Regulation 89 at 92.
Moosa I, ‘The Myth of Too Big to Fail’ (2010) Journal of Banking Regulation 319 at 320.
NDIC Annual Report 2009.
NDIC, ‘Nigeria Deposit Insurance Corporation – Closed Financial Institutions’ <http://www.ndic.org.ng/closed-financial-institutions.html> accessed 8 December 2016.
Editorial Staff, ‘Explaining Greece’s Debt Crisis’ (New York Times 17 June 2016) <http://www.nytimes.com/interactive/2016/business/international/greece-debt-crisis-eurozone.html> accessed 30 December 2016.
Nyantakyi EB and Sy M, ‘The Banking System in Africa: Main Facts and Challenges’ (2015) Africa Economic Brief 1 at 2.
Ogunleye GA, Perspectives on the Nigerian Financial Safety-net (2010) 19.
Ojukwu-Ogba NE, ‘Banking Regulation in Nigeria and the Lessons of the Global Financial Crisis’ (2013) Nigerian Institute of Advanced Legal Studies Journal of Business Law 38 at 39.
Omarova ST, ‘Rethinking the Future of Self-regulation in the Financial Industry’ (2010) Brooklyn Journal of International Law 665 at 667.
Onyeka U, ‘Bridge Banks Acquisition: Overcoming Challenges of Process Integration’ (National Mirror 20 January 2015) <http://www.nationalmirroronline.net/new/bridge-banks> accessed 30 December 2016.
Opeseitan T, ‘Sale of Bridge Banks under Threat’ Daily Independent (6 October 2014) 1.
Pantazis F, ‘The Greek Financial Crisis and the Voluntary Conferral of Jurisdiction to the ECJ in the Light of State Immunity’ (2013) Vienna Journal of International and Constitutional Law 521 at 522.
Perry S, ‘Cypriot Bank brings Claim over Greek Financial Crisis’ (2014) Global Arbitration Review 1 <http://www.globalarbitrationreview.com/news/article> accessed 3 September 2014.
Reint G, Lo Duca M and Vesala J, ‘Cross-border Bank Contagion in Europe’ (2009) International Journal of Central Banking 97 at 98.
Richardson G, ‘Deposit Insurance and Moral Hazard: Capital, Risk, Malfeasance, and Management’ (2007) Econ Journal Watch 296 at 302.
Roe MJ, ‘Structural Corporate Degradation due to Too-Big-to-Fail Finance’ (2014) University of Pennsylvania Law Review 1419 at 1423.
Santa M, ‘Analysis: Malta unlikely to follow Cyprus into Crisis’ (Reuters 13 May 2013) 1 <http://www.reuters.com/article/us-eurozone-malta-analysis> accessed 30 December 2016.
Schiavo GL, ‘The Development of a New Bank Resolution Regime in Europe: Fit for Purpose?’ (2014) Journal of International Banking Law and Regulation 689–704.
Singh D and LaBrosse JR, ‘Developing a Framework for Effective Financial Crisis Management’ (2011) OECD Journal of Financial Market Trends 1 at 4.
Soludo CC, ‘Global Financial and Economic Crisis: How Vulnerable is Nigeria?’ (2009) Paper presented to the House of Representatives Committee on Banking at the National Assembly, Abuja, on 21 January 2009.
Sriram MS, Chaturvedi V and Neti A, ‘Too Big to Fail versus Too Small to be Counted’ (2001) 62 BIS Working Paper 93 at 118.
Swire PP, ‘Bank Insolvency Law, Now that it Matters Again’ (1992) Duke Law Journal 469 at 472.
Thoma M, ‘Why Self-regulation of the Financial System won’t work’ (CBS MoneyWatch 17 April 2009) <http://www.cbsnews.com/news/why-self-regulation-of-the-fiancial-system-won’t-work/> accessed 3 January 2017.
Udo B, ‘Exclusive: CBN moves to insulate Eight Top Nigerian Banks from Distress’ (2013-09-19) Premium Times <http://www.premiumtimesng.com/business/144950-exclusive-cbn-moves-insulate-eight-top-nigerian-banks-distress.html> accessed 3 January 2017.
Wallace T and Chan SP, ‘Why Italy’s Banking Crisis will shake the Eurozone to its Core’ (The Telegraph 13 July 2016) <http://www.telegraph.co.uk/business/2016/07/16/why-italys-banking-crisis-will-shake-the-eurozone-to-its-core/> accessed 30 December 2016.
Wood P, Law and Practice of International Finance (Sweet & Maxwell 2011) 323.
Wood PR, ‘The Future of International Banking and Financial Law and Lawyers’ (2014) Singapore Journal of Legal Studies 355 at 361.
YCharts, US Number of Commercial Banks accessed 5 May 2017.
Zhou C, ‘Are Banks Too Big to Fail? Measuring Systemic Importance of Financial Institutions’ (2010) International Journal of Central Banking 205 at 223.
Zhu H, ‘Bank Runs, Welfare and Policy Implications’ (2005) Journal of Financial Stability 279 at 301.
Reported cases
Levenstein v The State [2013] ZASCA 147; 2013 (4) All SA 528 (SCA)
Savannah Bank of Nigeria v Central Bank of Nigeria [2009] All FWLR (Part 481)
Savannah Bank of Nigeria v Nigeria Deposit Insurance Corporation [2004] 11 NWLR (Part 883)
Legislation
Asset Management Corporation of Nigeria Act 2010 (AMCON Act 2010) as amended by the AMCON (Amendment) Act 2015
Central Bank of Nigeria Act 2007 (CBN Act 2007) ch C4 Laws of the Federation of Nigeria 2011
Nigeria Deposit Insurance Corporation Act 2006 (NDIC Act 2006) ch N102 Laws of the Federation of Nigeria 2011
South African Reserve Bank Act 90 of 1989, as amended by the South African Reserve Bank Act 57 of 2000
South African Cooperative Banks Act 40 of 2007
Downloads
Published
How to Cite
Issue
Section
Accepted 2017-08-01
Published 2017-11-15
