80733 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The World Bank does not guarantee the accuracy of the data included in this work. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The material in this publication is copyrighted. FINANCIAL SECTOR ASSESSMENT PROGRAM NIGERIA CRISIS MANAGEMENT AND CRISIS PREPAREDNESS FRAMEWORKS TECHNICAL NOTE MAY 2013 1 INTERNATIONAL MONETARY FUND THE WORLD BANK MONETARY AND CAPITAL MARKETS DEPARTMENT FINANCIAL SECTOR VICE PRESIDENCY AFRICA REGION VICE PRESIDENCY 1 This note is prepared on the basis of information received as of September 2012 2 Contents Page Glossary .................................................................................................................................... 3 Executive Summary .................................................................................................................. 4 I. The Nigerian Banking Crisis of 2008–2009 and the Policy Response .................................. 7 II. Institutional Framework ..................................................................................................... 10 A. Institutional Framework and Coordination Arrangements for Systemic Risk Monitoring and Crisis Management............................................................................ 10 B. Macroprudential Supervision ................................................................................. 13 C. Intra-Group Resolution........................................................................................... 15 D. Cross-Border Cooperation & Coordination ........................................................... 17 III. Supervisory Early Intervention of Problem Banks ........................................................... 21 IV. Crisis Management Tools ................................................................................................. 24 A. Official Financial Support ...................................................................................... 24 B. Orderly and Effective Resolution ........................................................................... 27 V. Deposit Insurance Framework ........................................................................................... 43 VI. Legal Protection ................................................................................................................ 47 Tables 1. Table of Recommendations................................................................................................... 6 2. Prompt Corrective Action Framework ................................................................................ 22 3. Summary of Resolution Measures ...................................................................................... 29 4. Systemic Crisis Management Framework in Part 4 of SIF ................................................. 34 5. AMCON in International Perspective ................................................................................. 40 Figure 1. Structure of the Nigerian Financial System ........................................................................ 11 Boxes 1. Timeline of Nigerian Banking Crisis .................................................................................... 9 2. The Financial Services Regulation Coordinating Committee ............................................. 13 3. Proposed FSRCC Sub-Committee for Systemic Risk Monitoring and Crisis Preparedness/Management...................................................................................................... 16 4 Cross-Border Crisis Resolution: The Key Attributes........................................................... 20 5. Bail-in Within Resolution ................................................................................................... 31 6. AMCON Guidelines: Eligibility of Banking Assets and Collateral Valuation .................. 36 Annex 1. Overview of the Nigerian Financial System, 2011 ............................................................. 49 3 GLOSSARY AMCON Asset Management Corporation of Nigeria AMCON Act AMCON Act 2010 BCEAO Banque Centrale des Etats de l’Afrique de l’Ouest BOFIA Bank and other Financial Institutions Act 1991 (as amended 1999) BSD Banking Supervision Department, CBN CAMA Companies and Allied Matters Act, 2004 CAR Capital adequacy ratio CBN Central Bank of Nigeria CBN Act Central Bank of Nigeria Act, 2007 CMG Crisis Management Group COBAC Commission Bancaire de l’Afrique Centrale DIF Deposit Insurance Fund DMO Debt Management Office EBA Eligible Bank Asset EFI Eligible Financial Institution ELA Emergency liquidity assistance Failed Banks Act Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act, 1994 FSB KA Financial Stability Board Key Attributes of Effective Resolution Regimes for Financial Institutions FSR Financial Stability Report FSRCC Financial Services Regulation Coordinating Committee M&A Merger and Acquisition MoU Memoranda of Understanding MoF Ministry of Finance ₦ Nigerian Naira NDIC Nigeria Deposit Insurance Corporation NDIC Act Nigeria Deposit Insurance Corporation Act, 2006 NPLs Nonperforming loans OBA Open bank assistance P&A Purchase and assumption PCA Prompt Corrective Action RRP Recovery and resolution plan SIF Supervisory Intervention Framework of 2011 SIFI Systemically important financial institution 4 EXECUTIVE SUMMARY2 This note elaborates on the recommendations made in the Financial Sector Assessment Program (FSAP) for Nigeria in the areas of contingency planning, crisis management and bank resolution. It summarizes the findings of the FSAP mission undertaken during September 4–19, 2012 and is based upon analysis of the relevant legal and policy documents and extensive discussions with the authorities and private sector representatives. The Nigerian financial system experienced a banking crisis in 2008-2009, partly triggered by the global financial crisis and by domestic events. A special examination revealed that 10 banks, accounting for about a third of the banking system assets were either insolvent or undercapitalized. The authorities responded with a comprehensive range of measures that ultimately mitigated the shock of the banking crisis. The Central Bank of Nigeria (CBN) injected ₦620 billion of liquidity into the banking sector, granted a guarantee of inter-bank deposits, introduced a blanket guarantee on all deposits and foreign credit lines and replaced management in eight Nigerian banks. The Asset Management Corporation of Nigeria (AMCON) was established to purchase nonperforming loans (NPLs) of banks and to recapitalize banks. The decisive crisis response effectively stabilized the banking system, but the challenge now is to devise a credible exit strategy and to strengthen the resolution framework. This technical note discusses the lessons learnt and makes a number of recommendations.  Institutional framework. The CBN played the primary role in managing the crisis. Although the CBN remains the lead agency for financial stability matters, the mission recommends that the inter-agency committee, the Financial Services Regulation Coordinating Committee’s (FSRCC) mandate be expanded to include financial stability and crisis preparedness/ management, to promote a more engaging interagency policy dialogue across the various agencies on these matters. As Nigerian banks have numerous subsidiaries in the region, existing cross-border cooperation agreements for supervision should be enhanced and extended to cover resolution issues.  Supervisory early intervention. Since the crisis, the authorities have enhanced enforcement and issued a Supervisory Intervention Framework of 2011 (SIF), which includes a prompt corrective action (PCA) regime. However, the early intervention powers in the Bank and Other Financial Institutions Act (BOFIA) and the SIF need to be aligned to ensure that the PCA framework has a sound statutory footing. The CBN should also consider implementing recovery and resolution planning for banks that are systemically important financial institutions (SIFI) in Nigeria.  Official financial support. The CBN took a number of crisis measures which exposed its balance sheet. Moving forward, the mission recommends that the CBN’s role be limited to providing an emergency lending facility for banks facing liquidity problems, with a comprehensive framework to be developed. For banks that face solvency problems, the 2 This note was prepared by Dawn Chew (IMF) and Miquel Dijkman (WB). 5 Federal Ministry of Finance (MoF) should step in to provide financial support. The Nigerian Deposit Insurance Agency’s (NDIC) unusual statutory role in providing emergency liquidity assistance and guarantees should be removed. Financial support from the NDIC to banks should be limited to assisting resolution measures and subject to a cap. The authorities should also consider measures to unwind the blanket guarantee.  Crisis Management Tools. The CBN and the NDIC have a broad resolution toolkit which was put to use during the crisis to resolve the intervened banks. The authorities arranged mergers and acquisitions (M&A), set-up bridge banks to take over assets and liabilities of problem banks and established an asset management company (AMC) to deal with NPLs and recapitalization of banks. Legislative amendments should be made to allow resolution authorities to override the rights of shareholders, prevent a suspension or reversal of proceedings if there are challenges to a resolution action, with appropriate safeguards such as judicial review and payment by way of monetary compensation. Resolution tools could also be enhanced by providing for mandatory recapitalization, power to write-down capital and statutory bail-in.  Systemic Crisis Management framework. While it is acknowledged that certain measures have to be taken in the event of a systemic crisis, the mission recommends that the public framework set out in the SIF be withdrawn as it creates expectations that banks will be bailed-out using public funds, raising moral hazard issues. Bank liquidation is effectively ruled out in the framework, even for non-viable banks. Private sector solutions should be favored and the industry should bear the costs  AMCON. This agency has been a central element in the authorities’ response to the financial crisis but it should only have a temporary purpose, and continuation of its activities when normal banking business is restored becomes counterproductive. While AMCON notionally has a life of around ten years, this is not formally assured. It is important to establish formally a sunset provision ensuring that AMCON winds down its activities within that timeframe, or better earlier. To reinforce this, AMCON should no longer purchase any assets from banks, and should be given a time path and annual targets for disposal of its assets. The appointment of advisors to determine the future of the three “AMCON banks� is welcome; as with the assets, early restructuring and divestiture or resolution would be appropriate. AMCON’s funding arrangements require strengthening too. It is important that the bill establishing the Resolution Cost Fund be approved, and that the proceeds are clearly earmarked for the repayment of the outstanding bonds. In light of the sizeable redemptions in 2013-2014, a rollover strategy urgently needs to be devised.  Deposit Insurance. The deposit insurance scheme is structured as a risk-minimizer. The NDIC has broad supervisory and resolution responsibilities. The deposit insurance coverage is broadly adequate and the scheme is ex-ante funded. However, the NDIC should be exempted from the Fiscal Responsibility Act so as to build up the fund. Further, the NDIC should have a credit line to the MoF rather than the CBN. The statutory 90-day pay out period is too long and should be shortened significantly.  Lastly, legal protection for the CBN, NDIC, AMCON and their staff could be enhanced to deal with the numerous challenges faced. Recommendations made relate to reversing the 6 burden of proof, elevating the threshold for commencing action and providing for an express indemnity for legal costs for the staff. This note is structured as follows: Chapter II sets out an overview of the Banking Crisis of 2009; Chapter III analyses the institutional framework and coordination arrangements for systemic risk monitoring, crisis management and cross-border coordination; Chapter IV assesses the approaches to intervene with potential problem institutions at an early stage; Chapter V covers crisis management tools including official financial support, the resolution framework, AMCON; Chapter VI reviews the deposit insurance framework, and Chapter VII address the issue of legal protection. Table 1. Nigeria: Table of Recommendations Recommendations and Authority Responsible for Implementation Timeframe Introduce an explicit statutory mandate for systemic risk monitoring and crisis preparedness/ for the FSRCC and 1-2 years strengthen the analytical framework for financial stability monitoring (FSRCC, CBN) Revive the regular meetings of the Technical and Executive Committees of the CBN-NDIC (CBN, NDIC) 6-12 months Amend CBN Act to formalize PENCOM’s membership in FSRCC 1-2 years Withdraw the CBN circular restricting recapitalization of foreign subsidiaries by Nigerian parent banks (CBN) 6-12 months Expand cross-border and domestic MoUs to cover crisis management and resolution aspects (CBN, FSRCC) 1-2 years Establish Colleges of Supervisors for Nigerian banks and Crisis Management Groups and implement recovery 2-3 years and resolution planning (CBN, NDIC) Amend the BOFIA and NDIC Act to ensure that the PCA framework has a statutory footing (CBN, NDIC) 1-2 years Amend BOFIA and NDIC Act to strengthen the resolution regime by having the power to override shareholder’s 1-2 years rights, prevent a suspension or reversal of resolution proceedings on challenge, expand resolution toolkit, harmonize and expand resolution triggers (CBN, NDIC) Develop an ELA framework for the CBN and take measures to ensure that the MoF can provide solvency 1-2 years support on an urgent basis (MoF, CBN) Amend NDIC Act to remove possible NDIC liquidity support to banks and cap any financial assistance for 1-2 years resolution measures to amount of payout of insured deposits (NDIC) Discontinue AMCON’s acquisition of problem assets and remove relevant prudential requirements, earmark cash 6-12 months flows for repayment of bonds, sunset clause for disposal of NPLs and assets with specific disposal targets, divest ownership in the three banks, and establish a firm end-2017 closing date (MoF, CBN, AMCON) Withdraw Part 4 of the Supervisory Intervention Framework relating to systemic crisis management (CBN) 6-12 months Unwind the blanket guarantee introduced during the crisis with appropriate communication (CBN) 6-12 months Reinstate CBN’s authority to appoint NDIC as liquidator immediately upon revocation of license and exempt 1-2 years banks from Company Winding Up Rules (CBN) Exempt the NDIC from the Fiscal Responsibility Act of 2007 (MoF) 6-12 months Divest CBN’s shareholding in NDIC and replace the credit line to the CBN with a credit line to the MoF (MoF, 1-2 years CBN) Shorten statutory payout period for insured deposits to 15 days and change to gross payout 1-2 years 7 I. THE NIGERIAN BANKING CRISIS OF 2008–2009 AND THE POLICY RESPONSE 1. The Nigerian financial system underwent major structural changes leading up to the 2008–2009 crisis and beyond. The banking system currently accounts for over 80 percent of financial sector assets and represents about 53.6 percent of GDP. Following a program of consolidation and recapitalization, the number of banks was reduced from about 90 in 2005 to 24 by 2006 and by end–2011, there were 20 commercial banks, with ₦18.2 trillion assets and ₦12.5 trillion in deposits (about US$81 billion), and one Islamic (non-interest) bank. Three banks, Stanbic, Standard Chartered, and Citibank, are foreign- owned. They hold about 14 percent of assets in the industry. Three banks, Enterprise, Keystone, and Mainstreet, are publically owned. They hold about 5 percent of industry assets. The others are domestic and privately-owned (see Annex 1 for an overview of the financial system). 2. The banking crisis had its origins in the forced consolidation of the sector in 2005-2006. The consolidation was not accompanied by sufficient supervision to ensure that the capital of merged institutions was adequate. During this period, there was a high growth rate of credit to the private sector and most of the expanded credit was used to purchase equities, in many cases in the stocks of domestic commercial banks that were extending the credit. When the equity bubble burst, NPLs rose from 6 percent to 28 percent of total loans in December 2009. Ten banks were particularly hit because of their large exposure to equity-related loans. The crisis triggered a sustained depreciation of the domestic currency and a sharp fall in the highly inflated stock market. Excessive margin lending and unhedged loans to oil importers that became nonperforming, as well as other credit malpractices, resulted in a spike in NPLs in the banking system. 3. A special examination in the autumn of 2009 of all banks by the CBN and the NDIC revealed that 10 banks, accounting for about a third of the banking system assets, were either insolvent or undercapitalized. The examination reports were finalized in August 2009 and revealed that banks had sizable off balance sheet instruments that concealed NPLs while, in other cases, NPLs were rolled over or otherwise classified as performing. Serious governance problems were also identified. There were serious cases of connected lending and undercapitalization. The CBN replaced management in eight banks and proceeded to take action against the ex-CEOs and directors. Soundness indicators showed that the ratio of liquid assets to total assets for the system stood at 17.9 percent by September 2009 and NPLs was over 26 percent (on the basis of the special examination). In relation to the 10 banks, weighted capital to assets was a negative 24 percent and NPLs were at 65 percent of loans. Three banks reported moderate insolvency with negative 3.5 percent capital to assets or less while the other seven banks showed severe insolvency at negative 18 percent (Oceanic) and 69 percent (FinBank). 4. The authorities intervened decisively by injecting liquidity into the troubled banks and providing broad guarantees, which was crucial in safeguarding stability. The 8 CBN injected ₦620 billion (about US$4.1 billion) of liquidity into the banking sector in the form of unsecured and subordinated debt and provided a guarantee of all interbank lending transactions (expired end-December 2011), foreign credit lines, and pension deposits. 5. To instill public confidence, the authorities made a public commitment to protect depositors and creditors against losses and that no bank would be allowed to fail. These quick measures stabilized the banking system and allowed the authorities time to design a strategy to resolve the intervened banks. 6. After the initial crisis containment phase, the key focus of the authorities under the bank resolution phase was to restructure the banks. Most intervened banks showed negative capitalization and high levels of NPLs. There was an urgent need for new capital through recapitalization and relief from problem assets. In addition, there were widespread governance issues, such as insider abuse and involving criminal activity. 7. In 2010, the authorities set up the AMCON to purchase NPLs of banks. NPLs were purchased by AMCON in exchange for tradable three-year zero coupon bonds issued by AMCON and guaranteed by the federal government, to bring five of the eight insolvent banks to zero equity. 8. By September 2011, AMCON had purchased all the NPLs of the intervened banks and the recapitalization of the intervened banks were completed. The health of the banking sector significantly improved at end–December 2011. The industry’s average CAR was 17.9 percent, with the lowest CAR at 10 percent and highest at 31 percent at end– December 2011. The industry’s ratio of NPLs to total loans declined to 5 percent, from 15.5 percent at end December 2010. All banks met the minimum liquidity ratio of 30 percent at end-December 2011. The banking industry’s cash reserve ratio was 8 percent. Box 1 provides a timeline of the crisis response measures. 9. The authorities removed the CBN guarantees on all interbank liabilities at the end of 2011. This was based on their assessment that there had been no new problems with the recapitalized banks. Outstanding interbank guarantees at end–December 2011 were ₦275.2 billion. However, no official announcement has been made in relation to the public commitment to protect depositors and creditors against losses. 10. The decisive crisis response effectively stabilized the banking system, but the challenge now is to devise a credible exit strategy. Thanks to a decisive and timely initial policy response, stability was maintained amidst a series of unprecedented shocks. However, maintaining support measures can carry significant costs in terms of public resources and moral hazard. Going forward, as the financial system is strengthening; it is time to gradually unwind some of the support mechanisms introduced in the crisis. The remainder of this note makes recommendations on what steps should be taken to unwind these mechanisms as well as how to strengthen the crisis management regime, guided by international good practices. 9 Box 1. Timeline of Nigerian Banking Crisis August 14, 2009 CBN releases audit reports on 10 banks. Intercontinental Bank Plc, Oceanic Bank Plc, Afribank Plc, Union Bank of Nigeria Plc and Finbank Plc (31 percent of banking system) fail the stress tests––the largest, Union had negative capital and the other four had weak capitalization and high levels of NPLs. CBN replaces senior management and injects ₦420 billion into five banks. August 18, 2009 Enforcement Financial Crimes Commission arrests three ex-CEOs and nine others. August 19, 2009 CBN publishes list of bank debtors. August 31, 2009 Enforcement Financial Crimes Commission arraigns sacked bank CEOs. October 2, 2009 CBN fires ETB, Spring Bank Plc and Bank PHB Plc CEOs and executive directors. Gives these three banks a ₦200 billion lifeline. Wema and Unity Banks get June 30, 2010 deadline to recapitalize. October 14, 2009 CBN releases fresh debtors’ list. January 25, 2010 CBN limits bank CEOs’ tenures. February 15, 2010 CBN performs fresh audit of banks. June 30, 2010 CBN extends recapitalization deadline for Wema and Unity Banks. July 19, 2010 President signs the Asset Management Corporation of Nigeria Bill. August 16, 2010 CBN unfolds plan to sell the eight rescued banks. January 1, 2011 AMCON takes over ₦2 trillion of nonperforming loans from the rescued banks and other banks. May 12, 2011 Shareholders lose bid to stop CBN from selling the eight rescued banks. June 2, 2011 CBN gives rescued banks till September 30 to recapitalize or face liquidation. July 2011 Finbank, Intercontinental and Union Banks sign binding Transaction Implementation Agreements with First City Monument Bank Plc, Access Bank Plc and African Capital Alliance for recapitalization. July 18, 2011 CBN extends interbank credit guarantee for Finbank, Union and Intercontinental Banks to December 31, 2011. July 29, 2011 Ecobank Transnational Incorporated, parent company of Ecobank Plc, signs a Transaction Implementation Agreement with Oceanic Bank. August 4, 2011 CBN extends interbank credit guarantee for Oceanic Bank to December 31, 2011. August 5, 2011 CBN and NDIC create three bridge banks to take over Bank PHB, Spring Bank Afribank. These banks were almost immediately recapitalized by AMCON. 10 II. INSTITUTIONAL FRAMEWORK A sound institutional framework for crisis management and bank resolution requires clear and effective legal underpinnings both within each institution’s legal framework, as well as among the relevant institutions. For example, each institution should have a strong and clear mandate. In addition, there should be an adequate allocation of labor across the institutions and explicit coordination mechanisms between the institutions, including solid legal bases for the exchange of confidential information. A. Institutional Framework and Coordination Arrangements for Systemic Risk Monitoring and Crisis Management 11. The Nigerian financial system comprises the following regulatory agencies, with the CBN being the only agency with an express financial stability mandate:  The MoF is the government department responsible for the control and management of the public finance of the Federation. Its functions include preparing annual estimates of revenue and expenditure for the Federal government, formulating policies on fiscal and monetary matters, maintaining internal and external value and stability of the Nigerian currency, supervising the insurance industry etc.  The CBN is the central bank and prudential regulator and supervisor for the banking sector. The objectives of the CBN are set out in the Central Bank of Nigeria Act, 2007 (CBN Act)3 and its principal objectives include ensuring monetary and price stability and promoting a sound financial system in Nigeria. The BOFIA empowers the CBN to supervise and regulate the activities of banks.4 The CBN is also consulted by the NDIC on resolution actions.  The NDIC administers the deposit insurance scheme (DIS), supervises banks5, and is the resolution authority as well as bank liquidator.  The National Securities Exchange Commission (SEC) is the corporate organization charged with the function of registering all securities proposed for subscription by the public or to be sold in the market. It has the responsibility to maintain surveillance over the securities market and to protect its integrity.  The National Insurance Commission (NAICOM) is responsible for administration, supervision, regulation and control of insurance business in Nigeria while the 3 Section 2 of CBN Act. 4 Sections 31 & 34 of BOFIA. 5 Part VI of NDIC Act. 11 National Pension Commission (PENCOM) is the body that regulates, supervises and ensures the effective administration of pension matters. Figure 1 gives an overview of the structure of the Nigerian Financial System. Figure 1. Nigeria: Structure of the Nigerian Financial System Presidency/ National Assemby PENCOM CBN MoF AMCON NDIC SEC NAICOM 12. In addition to the financial safety net players, the judiciary also plays a role. The Federal High Court hears the winding up petition of the NDIC, appoints the NDIC as the liquidator of the banks and adjudicates claims under the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act, 1994 (Failed Banks Act). 13. Amongst the members of the financial system, the CBN is the only agency with an express mandate for financial stability. Section 2(d) of the CBN Act provides the CBN with the mandate to promote a sound financial system in Nigeria. The CBN has a Financial System Stability Directorate, headed by a Deputy Governor. This Directorate has four departments, including the Banking Supervision (BSD) and Financial Policy and Regulation departments (FPRD) and the mandate for financial stability is split between these two departments. A CBN Board Committee on financial stability is charged with the responsibility of ensuring the stability of the financial system. This Board Committee receives input from a committee on financial stability made up of departmental directors. 12 The Financial Services Regulation Coordinating Committee 14. The Financial Services Regulation Coordinating Committee (FSRCC)6 is an inter-agency committee that coordinates the supervision of financial institutions. Established in April 1994 to facilitate a formal framework for the coordination of regulatory and supervisory activities in the financial sector, it was accorded legal status in 1998 and formally inaugurated by the Governor of CBN in May 1999. Box 2 elaborates on the membership and sub-committees. PENCOM’s membership needs to be formalized. 15. There is a multilateral Memorandum of Understanding (MoU) for information sharing between members of FSRCC and a website through which information is shared among member agencies. The MoU identifies the types of information that are shared amongst the members of the FSRCC, such as that relating to the identity of licensed entities, their status, enforcement action taken against them. The FSRCC sub-committee on information sharing has developed an information sharing portal on the FSRCC website for member agencies, with different types of information accessible by staff of varying levels of seniority. 16. Although the FSRCC existed during the banking crisis of 2008–2009, it did not play any role in managing the crisis. The FSRCC did not meet for two years during the crisis and the crisis was instead managed primarily by the CBN. 17. The FSRCC does not have an express statutory mandate for financial stability. The charter to the FSRCC suggests that the FSRCC may consider issues relating to financial system distress, examine resolution options and recommend actions. This is however not reflected in the statutory mandate. The FSRCC currently functions as more of a forum for information sharing and coordination of regulatory initiatives e.g., in relation to corporate governance and consolidated supervision issues. 18. The objectives of the FSRCC could be expanded to include systemic risk monitoring and crisis preparedness/ crisis management. A more engaging dialogue on financial stability matters is called for as this would bring considerable advantages in terms of preparing for the eventuality of crises. Considering that the FSRCC comprises all the financial sector safety net players, it is the natural platform for coordination and information exchange about financial stability issues at the national level. Even so, the CBN remains the lead agency for financial stability matters. In fact, periodic interagency discussion on the financial stability outlook should be centered on the CBN’s bi-annual Financial Stability Report (FSR). 6 CBN Act (Section 43), initially established as the Financial Services Coordinating Committee, renamed the FSRCC in May 1994. 13 B. Macroprudential Supervision 19. The FSRCC would also be the natural forum for macroprudential policymaking. Macroprudential policy transcends the responsibilities and mandates of individual regulatory agencies. The formulation of a coherent package of macroprudential policies therefore requires strong cooperation and coordination mechanisms between the players represented in the FSRCC. Considering the amplitude of the financial cycle and the volatility of the real economy, there is a strong case for establishing a robust framework for macroprudential policymaking. Box 2. The Financial Services Regulation Coordinating Committee Membership: The FSRCC is chaired by the Governor of the CBN and comprises of the Managing Director of the NIDC, the Director-General of the SEC, the Commissioner for Insurance, the Registrar-General of the Corporate Affairs Commission (the body that administers the provisions of the Companies and Allied Matters Act) (CAC); and a representative of the MoF. The Director-General of PENCOM has also been admitted as a member of the FSRCC but the CBN Act needs to be amended to formalize this. The Nigerian Stock Exchange, Abuja Securities and Commodities Exchange and the Federal Inland Revenue Service send observers to the FSRCC. The CBN serves as the Secretariat of the FSRCC. Objectives: Its objectives include: (i) to coordinate the supervision of financial institutions especially conglomerates; (ii) to reduce arbitrage opportunities; (iii) to deliberate on problems experienced by members with any financial institution; (iv) to eliminate any information gaps; and (v) to articulate strategies for the promotion of safe, sound and efficient practices by financial intermediaries. Under Article 4 of the Charter of the FSRCC, the functions are stated as including to:  Identify the causes of distress in the financial system, examine resolution options adopted so far and recommend any other solutions and measures to avert future distress;  Examine the regulatory and supervisory standards of each member and recommend areas that require joint supervision and enforcement. Sub-Committees: The FSRCC has five standing sub-committees:  Financial Sector Soundness (Chair: CBN) that conducts surveillance over potential risks and recommends measures to avoid systemic crisis.  Harmonization and Coordinating (Chair: NDIC) that examines regulatory and supervisory standards, recommends joint supervision and enforcement and capacity building.  Information sharing (Chair: NSEC) that identifies mechanisms and processes for information sharing.  Legal and enforcement (Chair: CAC) that identifies overlaps, gaps, conflicts, inconsistencies and enforcement cooperation.  Financial Market Development (Chair: NAICOM) that indentifies and recommends areas to improve the financial system. Decision making: FSRCC decisions are taken on a consensual basis and implemented via the individual member agencies. 14 20. A successful conduct of macroprudential policies requires the presence of a well- established analytical framework on the basis of which policymakers can make informed choices. The current framework falls short in a number of aspects. Coverage of non-bank financial institutions (which accounts for more than 20 percent of financial system assets) in the FSR is limited as the other supervisory agencies are not involved in the drafting. This hinders the adoption of a holistic, system-wide perspective. 21. Besides widening the scope, the CBN faces the challenge of developing a conclusive methodology for assessing systemic risks. The current FSR is rather narrative and descriptive. It does not provide conclusive guidance as to where the main sources of systemic risk in the financial system lie. Macroprudential analysis should periodically assess the level of systemic risk that has accumulated in the financial system at a given point in time (i.e., the so-called time series dimension of systemic risk). The objective is to identify the key risks to financial stability, and to propose measures to halt the accumulation of systemic risk. This calls for the identification of a broad range of financial soundness and real economy sector indicators that are to be included in the monitoring exercise, and the adoption of methodologies for trigger points that denote building imbalances. 22. The CBN is also in the process of developing criteria for the identification of SIFIs. In line with practices elsewhere, the identification of SIFIs involves an analysis of indicators for banks’ size, interconnectedness and their substitutability. The CBN is finalizing the set of criteria and corresponding thresholds, but it has indicated that the list of SIFIs banks overlaps with the Nigerian parent banks with foreign subsidiaries––which are required to keep additional capital buffers compared to their domestic peers (i.e., 15 percent compared to 10 percent). The exercise only involves domestic indicators for systemic relevance and does not consider the systemic importance of banks in foreign jurisdictions. 23. With the assistance of external consultants, the CBN is in the process of strengthening these analytical underpinnings of the macroprudential framework. Although its current headcount of twenty-six employees seems adequate, it faces skill shortages in specific specialized areas, including statistics and legal, which it intends to address by hiring additional staff. Besides macroprudential analysis, the consultancy project covers a broader range of areas, including crisis handling and resolution (i.e., Early Warning Systems, scenario analysis, and CBN’s contingency planning arrangements), the microprudential framework (i.e. mandates, powers, resources and processes) and the legal underpinnings of the CBN’s operations. A theme that cuts across the different aspects of the consultancy project is the adequacy of data (e.g., coverage, availability, timeliness and reliability). CBN-NDIC coordination 24. Although there is no MoU between the CBN and the NDIC, there appears to be appropriate information sharing arrangements between the CBN and NDIC, in the 15 form of express legislative provisions and in operational arrangements. The CBN and the NDIC conduct joint on-site supervisions and share a common electronic financial analysis surveillance system (eFASS) database for off-site supervision. Section 53 of NDIC Act provides that the corporation shall have access to reports of examination of the CBN and shall make reports of its examination available to the CBN. CBN shall also make available to NDIC information on insured institutions and is required to inform the NDIC of all contraventions of an insured institution of the NDIC Act. 25. The CBN and NDIC have established joint Executive and Technical Committees on Supervision. While these two committees have been established for the purposes of information sharing and coordination, these committees do not meet regularly and did not meet during the crisis. When dealing with distressed banks, there is an obvious need for both agencies to cooperate intensively, and a strengthening of the coordination arrangements is called for. 26. Moving forward, the CBN proposes to establish ad hoc Crisis Management Units (CMU). Such units, to be composed of the CBN and the NDIC staff, will be constituted whenever there is a crisis and intended to be a forum to coordinate crisis response measures. This unit however does not include representation by the MoF. 27. The mission recommends that:  Instead of establishing ad-hoc CMUs whenever there is a crisis, the FSRCC should have an explicit statutory mandate for financial stability. It should carry out risk monitoring and be the forum for crisis preparedness/coordination. Box 3 illustrates the recommended role for the FSRCC.  The meetings of the CBN-NDIC Executive and Technical Committees should be revived to enhance coordination between the CBN and the NDIC in their dual roles as bank supervisors and resolution authorities and provide a forum for information sharing at both the technical and highest levels within each institution.  The CBN Act should be amended to formalize PENCOM’s membership in the FSRCC. C. Intra-Group Resolution 28. As part of the regulatory reform in response to the banking sector crisis, the CBN has repealed earlier universal banking guidelines. With the repeal of these guidelines in November 20107, Nigeria reintroduced a narrow banking model. Nigerian banks will no longer be allowed to perform nonbanking activities. Banks are required to 7 Regulation on the Scope of Banking Activities & Ancillary Matters, No. 3, 2010. 16 submit plans for divestiture of nonbanking assets (insurance and securities activities), including the possibility of reconstituting the bank into a holding company that in turn owns separate banking and nonbanking subsidiaries. 29. The framework for the regulation of bank financial holding companies is being worked out in the proposed amendments to the BOFIA. In line with the Financial Stability Board Key Attributes of Effective Resolution Regimes for Financial Institutions, October 2011 (FSB KA), the authorities should ensure that the resolution regime for financial institutions should extend to (i) holding companies of a firm; (ii) non-regulated operational entities within a financial group or conglomerate that are significant to the business of the group or conglomerate; and (iii) branches of foreign firms.8 Box 3. Proposed FSRCC Sub-Committee for Systemic Risk Monitoring and Crisis Preparedness/Management Systemic risk monitoring and crisis preparedness/management could be delegated to the Financial Sector Soundness Sub- Committee, with a regular reporting and recommendation making requirement to the main committee. The legal mandate of each member of the FSRCC should be able to support macroprudential and crisis preparedness and management policies by having the mandate to contribute to or to foster financial stability. For the purposes of systemic risk monitoring, the FSRCC should:  Meet regularly (e.g., quarterly or more frequently as needed) to monitor and assess systemic risks and to formulate plans and strategies to address them. Such a contingency plan should identify the necessary human resources, legal basis, lines of communication with other institutions and action plans for failure of a SIFI or a systemic crisis. Such a plan should also include formal communication channels with other supervisory agencies and foreign supervisors/regulatory authorities.  Develop a framework for macroprudential supervision. This calls for a significant strengthening of macroprudential surveillance so that policymakers represented in the FSRCC can make informed choices. The scope of the FSR should be widened to include non-bank financial institutions, and a methodology that allows for a more conclusive assessment of systemic risk (i.e., financial soundness and real economy indicators and thresholds) needs to be adopted.  Advance the work on the identification of systemic banks. The identification of systemic banks should not only cover their importance in a domestic setting, but also their relevance for jurisdictions abroad. For the purposes of crisis preparedness/management, the FSRCC should:  Agree on a road map for crisis management, including having clarity on the individual roles and responsibilities for each agency. In this regard, the mandate vested upon each agency would need to be taken into account.  Be made responsible for crisis planning and preparedness, including undertaking simulations to test the capacity of the authorities. In addition, stress tests should also be conducted on a regular basis and the results acted upon. Further, the FSRCC should:  Ensure that there are no legal and operational hurdles for information exchange among the members. In this regard, the current MoU of the FSRCC and the web database for sharing information could be expanded to also cover information exchange relating to systemic risk monitoring and crisis preparedness/management.  Produce an annual report to Parliament/ President on its systemic risk monitoring and crisis preparedness activities. 8 FSB KA 1. 17 D. Cross-Border Cooperation & Coordination 30. In recent years, regional integration of the Nigeria’s banking system has increased substantially. Nigerian banks have set up subsidiaries across the continent, which has led to the emergence of pan-African banking groups. The cross-border operations of Nigerian banks typically account for a relatively small share of overall group assets (e.g., around 20 percent in the case of United Bank of Africa). Nonetheless, in some West- African countries, Nigerian subsidiaries represent the lion’s share of the banking system. From a host perspective, four foreign banking groups (Standard Chartered, Citibank, Stanbic/IBTC and Ecobank) have a presence in Nigeria. 31. In tandem with the regional expansion, the CBN has gradually enhanced cross- border oversight, covering key aspects of going concern supervision. The CBN has created a unit dedicated to the supervision of cross-border institutions in the BSD and it has put in place a Framework for the Supervision of Cross-Border Institutions (Cross-Border Framework). The framework is intended to provide guidance on the supervision of Nigerian banks with offshore subsidiaries and also on the level of cooperation expected from host countries in the supervision of cross-border entities. 32. Bilateral MoUs have been established with a significant number of jurisdictions with Nigerian banking presence. The CBN has entered into bilateral MoUs with all English Speaking West African Countries, Bank of Ghana, Banking Commission for Central Africa (COBAC), China Banking and Regulatory Commission, Bank of Uganda, U.K. Financial Services Authority (FSA), South Africa Reserve Bank, National Bank of Rwanda, Bank of Zambia, Central Bank of Kenya, Central Bank of West-African States (BCEAO), Central Bank of the Gambia, Bank of Sierra Leone, Western African Monetary Zone (WAMZ) (Gambia, Ghana, Guinea & Sierra Leone), Bank Negara Malaysia, Central Bank of Liberia and Central Bank of Guinea. The MoUs contain details on information sharing, on-site examinations, confidentiality of shared information and consolidated supervision9; they do not cover aspects related to crisis management and resolution. In recent times, the establishment of MoUs with host regulatory authorities has become a prerequisite for the initiation of Nigerian banking operations in foreign jurisdictions. 33. The CBN is also a member of the College of Supervisors of WAMZ, held quarterly. The WAMZ College is a generic college aimed at enhancing coordination and cooperation among supervisors, rather than the strengthening of supervision of individual 9 Section 33(6) of the CBN Act empowers the CBN, in exercise of its powers and on the basis of reciprocity, to enter into agreement or arrangements with other regulatory authorities in Nigeria or in other countries exercising similar responsibilities for the promotion of mutual cooperation and exchange of information for enhancing supervision and regulation, conditional upon assurances of confidentiality. 18 banks––whose geographical mapping does not match the composition of the college. The college meets quarterly. Its stated objectives are to facilitate the exchange of information among supervisors in the WAMZ area and to enable supervisors to develop a common understanding of the risk profile of a banking group as a starting point for risk based supervision at both the solo and consolidated levels. There is a portal for information-sharing among supervisors. The CBN and relevant host country Central Bank have commenced joint examination of Nigerian banks in West African countries (The Gambia, Ghana, Guinea and Sierra Leone). The CBN also participates in the core college established by FSA for Standard Chartered Bank held annually as a host authority. 34. According to the CBN, initial experiences have been encouraging, but it faces some serious challenges in further strengthening of cross-border supervision. Among the obstacles are differences in quality of supervision, divergences in reporting requirements and off-site monitoring systems and language barriers (particularly with francophone Africa). Some of the Nigerian banks have expanded significantly into jurisdictions where supervisory and enforcement capacity is weak, data reliability problematic and prudential returns are not subject to rigorous supervisory scrutiny. The CBN is aware that it has a vested interest in strengthening capacity in these jurisdictions and it has opened its supervisory training program for foreign inspectors. The CBN is also actively promoting the harmonization of reporting requirements and off-site monitoring tools through the adoption of eFASS in the region. 35. Ecobank, a pan-African financial conglomerate, presents particular cross- border supervisory challenges. Headquartered in Lome, the Togolese authorities are responsible for exercising consolidated supervision. In light of the supervisory weaknesses observed in some of the constituencies, this is a challenging task. Another factor is that the Togolese operations account for only a small share of the group’s asset and deposit base. While the CBN supervises the Nigerian operations on a stand-alone basis, challenges in exercising comprehensive group-wide supervision could be associated with a hidden build-up of intra-group exposures and double gearing of capital. The CBN therefore has an enlightened self-interest in ensuring that these risks are appropriately monitored and addressed by the home supervisor. 36. A recent circular, restricting Nigerian banks’ capacity to capitalize their foreign subsidiaries, is not in the spirit with enhancing cross-border cooperation and exposes Nigerian parent banks to considerable reputational risks. CBN Circular to banks of May 18, 201210 states that the CBN does not permit parent Nigerian banks from providing further capital outlays to foreign subsidiaries to augment their capital needs. Instead, banks are encouraged to consider alternative options such as M&As and sourcing fresh capital from the host country capital markets. Where such capital cannot be replaced, parent banks are 10 BSD/DIR/GEN/RFS/05/024. 19 required to submit exit strategies from those jurisdictions not later than June 30, 2012. Although the CBN claims that it would allow for exemptions for well-capitalized parent banks, the circular is drafted as a blanket prohibition. Such measures risk undermining the goodwill and trust of host authorities necessary to strengthen home-host cooperation and coordination. Nigerian parent banks may also be exposed to considerable reputational risk in case they are unable to come to the rescue of distressed foreign subsidiaries. 37. Home-host cooperation in the context of crisis management has received limited attention so far. The crisis did have a bearing on a number of foreign jurisdictions as the three intervened banks which had its assets and liabilities transferred to bridge banks had operations in Sierra Leone and Liberia. The governors of the host countries were given advance notice of the Nigerian authorities’ intention to temporarily transfer the banks into bridge banks, and then recapitalize them with AMCON. The CBN’s Cross-Border Framework attempts to set out a framework for cross-border crisis resolution. However, further work has to be done as the current framework envisages binding legal instruments or an international treaty, providing for burden sharing, contingency planning etc. Such a framework has yet to be translated into the legal framework in Nigeria and would also require the cooperation of foreign authorities. 38. Experiences in various constituencies during the global financial crisis have highlighted that crisis management and resolution is rendered more complex in a cross- border context. As such, the framework for early intervention and resolution should reflect the fact that banks are increasingly part of larger, international groups.11 In times of crisis, the coordination between home and host presents considerable challenges, while divergence in incentives often stand in the way of finding a cooperative solution that is in the best interest of both home and host authorities. 39. Advance preparation for the eventuality of crises can be helpful in reducing these challenges to more manageable proportions, so that home and host authorities pursue policies that consider international spillovers. As an illustration, Australia and New Zealand have statutory arrangements in place for the prudential regulators to support each other in meeting prudential regulation and financial stability responsibilities and to consult where practicable before taking action that might have a detrimental effect on financial system stability in the other country. The FSB KA seeks to provide a framework for cross-border coordination. Box 4 summarizes some of the features of this framework. 40. To enhance cross-border coordination and information sharing, particularly for resolution purposes, the mission recommends: 11 See IMF, Resolution of Cross-Border Banks – A Proposed Framework for Enhanced Coordination, 2010, p. 25-27. http://www.imf.org/external/np/pp/eng/2010/061110.pdf 20  The immediate removal of the CBN Circular banning recapitalization of foreign subsidiaries. Rather than a ban, the CBN should consider recapitalization needs on a case-by-case basis, which is already the case as existing prudential requirements would require CBN approval for outflows of capital.  Expanding the scope of cross-border MoUs to include crisis management. Ideally, home and host authorities pre-agree on key aspects, such as exchange of information, decision-making powers and procedures. It is especially important that the interests of smaller host countries, where Nigerian banks have a dominant presence but whose share in group assets and deposits is fairly low, take part in the arrangements. Box 4. Cross-Border Crisis Resolution: The Key Attributes A common theme reflected in the FSB KA is the requirement that national resolution authorities consider the impact of a resolution action on financial stability in other jurisdictions. Moreover, the FSB KA establishes several important principles for cross-border cooperation that are to be enshrined in national resolution frameworks.  Statutory mandate: The mandate of a resolution authority should empower and strongly encourage the authority, wherever possible, to act to achieve a cooperative solution with foreign resolution authorities.  No discrimination: National laws and regulations should not discriminate against creditors on the basis of nationality, the location of their claim, or the jurisdiction where it is payable.  Branches: The host resolution authority should have resolution powers over local branches of foreign institutions and the capacity to use its powers either to support a resolution carried out by a foreign home authority or, exceptionally, to take measures on its own initiative where the home jurisdiction is not taking action or acts in a manner that does not take sufficient account of the need to preserve the local jurisdiction’s financial stability.  No automatic action: Legislation in jurisdictions should not contain provisions that trigger automatic action in that jurisdiction as a result of official intervention or the initiation of resolution or insolvency proceedings in another jurisdiction. However, the FSB KA recognize that resolution authorities should be able to take discretionary national action, when necessary, to achieve domestic stability in the absence of effective international cooperation and information sharing.  Recognition and effect: Jurisdictions should provide for transparent and expedited processes to give effect to foreign resolution measures, either by way of a mutual recognition process or by taking measures under the domestic resolution regime that support and are consistent with the resolution measures taken by the foreign home resolution authority. Recognition or support of foreign measures should be provisional on equitable treatment of creditors in the foreign resolution proceeding.  Information sharing: The resolution authority should have the capacity in law, subject to adequate confidentiality requirements and protections for sensitive data, to share information with relevant foreign authorities, where sharing is necessary for recovery and resolution planning or for implementing a coordinated resolution. Jurisdictions should provide for confidentiality requirements and statutory safeguards for the protection of information received from foreign authorities.  Legal protection: The FSB KA provides for the protection for the resolution authority and its staff against liability for actions taken or omissions made in good faith domestically as well as in relation to actions taken in support of foreign resolution proceedings. 21  In its capacity as a home supervisor, the CBN should take the lead in initiating the dialogue with host authorities.  Colleges of Supervisors for specific banks should be established. Authorities in host countries where the bank has a material presence should participate. Within such colleges, Crisis Management Groups can be set up to ensure that relevant information is shared and recovery and resolution plans prepared on a group wide basis. The current “college� form WAMZ can be used to form bank specific colleges and expanded to include membership of all host authorities.  Mechanisms for the mutual recognition of decisions made in other jurisdictions in the context of insolvency or reorganization proceedings, subject to conditions such as non-discriminatory treatment of foreign creditors and reciprocity.  Ex-ante burden sharing arrangements,12 enabling home and host authorities to act quickly during a crisis and avoid protracted negotiations, but not to an extent that it implicitly cedes sovereign rights and compromises domestic depositors and creditors.13 III. SUPERVISORY EARLY INTERVENTION OF PROBLEM BANKS Early identification of problem banks and prompt remedial action is important to mitigate increased moral hazard risk. 41. Regulatory forbearance contributed to the banking crisis of 2008–2009. The lack of prompt enforcement action in relation to regulatory breaches and holding banks to remedial programs resulted in the authorities having to intervene in the eight banks.14 42. Since the crisis, the authorities have enhanced enforcement and issued the SIF. This framework sets out general and specific triggers for a range of corrective actions as well as a PCA regime, with corrective actions tied to prudential thresholds relating to capital adequacy ratios (CAR), asset quality, liquidity, earnings, risk management, internal control and system failures. Table 2 below sets out the PCA regime based on CAR. 43. The corrective and remedial powers of the CBN and the NDIC are generally adequate. Where the bank is not complying with laws, regulations, is engaging in unsafe or unsound practices that threaten the interests of depositors etc., the provisions of the BOFIA 12 See for example, the Nordic-Baltic Stability Group MoU on burden-sharing. 13 See the FSB Key Attributes and IMF, Resolution of Cross-Border Banks – A Proposed Framework for Enhanced Coordination, 2010, p. 23 – 25, on http://www.imf.org/external/np/pp/eng/2010/061110.pdf 14 See Sanusi Lamido Sanusi, “The Nigerian Banking Industry: what went wrong and the way forward,� February 2010. 22 and the NDIC Act contain a range of corrective supervisory tools ranging from conducting special examinations, prohibiting further extensions of credit, removing directors and managers to the ultimate revocation of license and liquidation of the bank.15 Further, bank directors, managers and other officers can face criminal penalties if they failed to prove that due diligence was exercised or failed to take reasonable steps to secure compliance by the bank of regulatory requirements.16 44. The SIF categorizes the supervisory tools into informal and formal actions. The choice of actions are guided by (i) the nature of the situation; (ii) the cause and/or motivation; (iii) the history of compliance; (iv) the systemic impact; (v) the risk exposure or profile; (vi) the parties involved; (vii) the management attitude; and (viii) prospects. Informal action is taken when the composite risk rating is low or moderate; such actions are not to be publicly disclosed by the institutions and are generally not enforceable in law. Formal actions are legally enforceable agreements requiring a bank to take remedial measures towards enforcement and applied when the composite risk rating is above average or high, informal actions have been unsuccessful, unsafe and unsound practices are evident and there are violations of laws and regulations. Such actions are publicly disclosed. Table 2. Nigeria: Prompt Corrective Action Framework Bank Classification Trigger CBN Supervisory Action Undercapitalized bank 5%