Moghalu Advocates New Approaches in Resolving Bank Failures in Nigeria

Following the recent failures of Silicon Valley Bank and Signature Bank in the United States of America, a former Deputy Governor of the Central Bank of Nigeria (CBN), Prof. Kingsley Moghalu, has recommended the adoption of the living wills concept in resolving bank failures in Nigeria.

Another approach proposed by Moghalu was that the regulators should encourage bigger and more successful banks to buy up weak banks as a first or second line of response to bank failures, without prejudice to the roles of the CBN/Nigeria Deposit Insurance Corporation (NDIC).

A living will for a bank or other financial institution denotes a contingency plan that is on the shelf in case that entity becomes insolvent and needs to be closed.
In a series of Tweets, the presidential aspirant of the African Democratic Congress (ADC) in 2022, noted that the recent failures of Silicon Valley Bank and Signature Bank in the United States, and the jitters over possible banking contagion they had generated took his mind back to the work they did under the Lamido Sanusi-led CBN to establish financial stability in Nigeria after the global financial crisis.

“We should deploy more the concept of “living wills” by banks. This is a plan for how a bank can be decently buried if it fails, designed by the bank itself and approved by CBN as the banking regulator. Another approach is that we should encourage bigger and more successful banks to buy up weak banks as a first or second line of response to bank failures, without prejudice to the roles of CBN/NDIC,” he wrote.

He pointed out that as Deputy Governor in charge of Financial Stability, it was his task to supervise the execution of many successful reforms.
Moghalu explained: “We took the position that no bank would fail, and no depositor would lose one kobo of their deposits. The CBN injected more than $4 billion to stabilise about eight failing banks, sacked and replaced their managements, and midwifed the creation of the Asset Management Corporation of Nigeria (AMCON) to buy up the toxic assets of these banks and recapitalise them.

“All of this was good for the time, and the apex bank has since followed the principle of not allowing bank failures. But I’m wondering if, going forward, we might not want to think of an approach to financial stability that does not place the responsibility for resolving bank failures solely on the CBN, the NDIC and AMCON through bailouts, creation bridge banks and recapitalisation. Banks are businesses created and run for profit by individuals. Must we in Nigeria continue to privatise their profits but socialise their losses? I don’t think so.”

“The bottom line is to protect depositors of course. America’s Signature Bank (no connection to the bank of the same name in Nigeria) was bought out by New York Community Bancorp which acquired its $34 billion of deposits. SVB was acquired by First Citizens Bank three weeks after it was shut down by America’s banking regulators.

“The CBN recently sold Polaris Bank (former Skye Bank) to private investors. But this was about 4 years after the bank’s failure. This is too long. Compare that with three weeks. We should be able to do such a sale within three to six months maximum.
“We need to avoid a framework that leads commercial operators to believe the central bank and its associated agencies are an ever-present Father Christmas. This is called moral hazard. It encourages risky behaviour by economic actors.”