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Reconciling Banking Regulation and the ‘Systemically Important Banks’ Syndrome: Deconstructing the Legal Constraints from a Nigerian Perspective

Patrick Osode, Nelson Ojukwu-Ogba

Abstract


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.


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References


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DOI: https://doi.org/10.25159/2522-6800/2956

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