Banking Regulation and Supervision Module 1

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Questions and Answers

What is the core objective of effective regulation and supervision in the banking system?

To promote stability in the banking system (correct)

To increase competition among banks

To reduce regulatory standards

To maximize profits for banks

The Basel Committee on Banking Supervision possesses formal supranational supervisory authority.

False

What were the Basel Accords primarily focused on?

bank capital adequacy

What is the main purpose of banking regulation?

To prevent systemic financial crises Signup and view all the answers

The Banking Consolidation program in Nigeria aimed at lowering the minimum capitalization requirements for banks.

False Signup and view all the answers

The Financial Services Regulation Coordinating Committee (FSRCC) was created to harmonize the laws, rules, guidelines, circulars, and administrative directives issued by various authorities to ensure _ in the financial sector.

coordinated supervision Signup and view all the answers

Match the following Basel Accords with their descriptions:

Basel I = Focused on capital requirements in 1988 Basel II = Addressed banking risks beyond credit risk in 2004 Basel III = Placed emphasis on liquidity standards in response to the global financial meltdown of 2007-2009 Signup and view all the answers

Who supervises banks in collaboration with the Nigeria Deposit Insurance Corporation?

Central Bank of Nigeria (CBN) Signup and view all the answers

The Nigeria Deposit Insurance Corporation (NDIC) was established in ___________ and commenced business in March 1989.

1988 Signup and view all the answers

Match the regulatory institution with its main responsibility:

Central Bank of Nigeria (CBN) = Supervising banks and managing the financial system Nigeria Deposit Insurance Corporation (NDIC) = Insuring customers' deposits and complementing CBN's role Securities & Exchange Commission (SEC) = Regulating the capital market and approving mergers and acquisitions Economic & Financial Crimes Commission (EFCC) = Investigating financial crimes and money laundering Signup and view all the answers

What are some of the major requirements imposed on banks to promote the objectives of the regulator?

Minimum Capital Ratios Signup and view all the answers

The Central Bank of Nigeria has the authority to revoke a bank's license for various reasons as per BOFIA regulations.

True Signup and view all the answers

Under what conditions can the Central Bank of Nigeria revoke a bank's license based on BOFIA regulations?

ceases to carry on banking business, goes into liquidation, fails to comply with conditions or obligations, undercapitalized, conducts business in an unsound manner, etc. Signup and view all the answers

Only a company duly incorporated in Nigeria with a valid banking license issued by the CBN can engage in ______ business.

banking Signup and view all the answers

Match the following functions with their descriptions as outlined in BOFIA regulations:

Corporate governance = Involves the structure and functioning of the bank's governing body Licensing of banks and other financial institutions = Permission for engaging in financial activities Anti-money laundering and counter-terrorism financing = Prevention measures against illegal financial activities Disclosure of Interest = Mandatory reporting of personal interests in bank transactions Signup and view all the answers

According to Section 49 of the Act, what constitutes an offence for a director, manager, or officer of a bank?

Both a and b Signup and view all the answers

The Federal Government, the Bank, or any officer cannot be held liable for their actions if they acted in good faith according to Section 51 of the Act.

True Signup and view all the answers

What is the minimum fine for contravening any of the Act's provisions where an offence or penalty is not expressly provided?

N2,000,000 Signup and view all the answers

Section 55 of the Act states that in case of bank liquidation, the ____ shall have priority over all other liabilities of the bank.

deposit liabilities Signup and view all the answers

What is the purpose of Banking Regulation and Supervision?

To ensure good corporate governance and safe banking processes. Signup and view all the answers

What are some consequences of non-compliance with banking laws and regulations?

All of the above Signup and view all the answers

What are some risks heightened by non-compliance?

Credit, liquidity, operational, reputational, market, and legal risks Signup and view all the answers

Banks are not required to comply with applicable banking laws, rules, and regulations.

False Signup and view all the answers

What are the three categories in which non-performing credit facilities should be classified?

Sub-standard, doubtful, lost Signup and view all the answers

What are the subjective criteria used to identify sub-standard credit facilities?

Well defined weaknesses that could affect borrower's ability to repay Signup and view all the answers

Facilities classified as Doubtful reflect that full repayment of the debt is certain.

False Signup and view all the answers

In order for collaterals to be considered for 'Haircut Adjustments', they must be Perfected, Realizable, with no restrictions on sale, and regularly ______.

valued Signup and view all the answers

Match the following bank capitalization levels with their corresponding actions:

Adequately capitalized = Conduct special examination Under-capitalized = Restrict dividend distribution Significantly under-capitalized = Request business plan for fresh funds injection Critically under-capitalized = Take over management and control and/or revoke license Signup and view all the answers

What is the primary goal of bank supervision?

Ensure safety and soundness of banks and stability of the financial system Signup and view all the answers

What does Risk Based Supervision involve?

All of the above Signup and view all the answers

Financial stability is one of the impacts of bank supervision. (True/False)

True Signup and view all the answers

Banks are required to undergo routine on-site examination _____ times a year.

twice Signup and view all the answers

Match the type of bank examination with their descriptions:

Routine Risk Assessment Examination = Asset Quality examination at financial year-end Special Examination = Conducted when safety and soundness are impaired Foreign Exchange Examination = Checks compliance with forex rules Special Investigations = Unscheduled activities to ascertain true positions Signup and view all the answers

Study Notes

Introduction to Banking Regulation

Banking regulation refers to laws made by Nigeria's federal legislature, subsidiary legislations made by regulatory authorities, and guidelines issued by the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC)

History of Banking Regulation in Nigeria

Era of Free Banking (1894-1952): No regulation, free entry and exit, many banks failed, and depositors lost money
Era of Regulation (1952-present): Started with the Banking Ordinance of 1952, introduced licensing and minimum paid-up capital requirements for banks
1958: Central Bank of Nigeria Act was enacted, vesting considerable institutional powers on the CBN
1968: Banking Act codified rules and regulations guiding the business of banking in Nigeria
Era of Indigenisation and Nationalisation (1972-1976): Compelled participation of Nigerians and the Federal Government in the acquisition of controlling equities of foreign banks
Era of Liberalisation (1984-1992): Removed stringent rules, led to the establishment of the deposit protection scheme in 1988
Era of Bank Consolidation (2004-2009): Increased minimum capitalization requirements for banks, reduced number of banks from 89 to 25

Why Banks are Heavily Regulated

Prevent systemic financial crises and ensure stability of the banking system
Safeguard deposits of individual customers and sustain public trust and confidence in banks
Prevent money laundering and other financial crimes
Ensure banks maintain sufficient liquidity and capital to meet their obligations
Protect consumers from fraudulent activities, unfair practices, and mismanagement of funds

Regulators of the Nigerian Banking Industry

Direct Regulators:
- Central Bank of Nigeria (CBN): supervises banks and manages the financial system
- Nigeria Deposit Insurance Corporation (NDIC): insures deposit liabilities of banks and other financial institutions
Indirect Regulators:
- Federal Ministry of Finance (FMF): handles fiscal policy and supervises the NDIC
- Securities and Exchange Commission (SEC): regulates the capital market and registers eligible securities
- Economic and Financial Crimes Commission (EFCC): investigates and prosecutes economic and financial crimes
- National Drug Law Enforcement Agency (NDLEA): identifies and prosecutes money laundering arising from illicit drug dealings

International Regulators

Basel Committee on Banking Supervision: established in 1974 to improve the quality of banking supervision worldwide
Basel Accords: sets minimum capital requirements for banks
- Basel I (1988): focused on credit risk
- Basel II (2004): expanded to include market risk, operational risk, and liquidity risk
- Basel III (2010): emphasizes liquidity standards and macroprudential regulation
International Monetary Fund (IMF) and the World Bank: promote public interest in the financial services sector

Core Principles for Effective Banking Supervision

29 core principles for effective banking supervision, including legal and institutional structure, regulatory structure, supervisory structure, and safety net arrangements### International Monetary Fund (IMF) and World Bank
Created at Bretton Woods conference in New Hampshire, USA in 1944
Goal: establish a framework for economic cooperation and development to lead to a more stable and prosperous global economy
IMF focuses on macroeconomic issues
World Bank focuses on long-term economic development and poverty reduction

Regulation and Supervision

Regulation: setting standards, rules, or laws that govern the banking industry
Supervision: ensuring that banks comply with regulations and operate safely and soundly
Importance of regulation: protects consumers, promotes financial stability, and prevents financial crime
Reasons for adapting to regulatory change:
- Comply with the law
- Reduce risk
- Improve efficiency
- Remain competitive

General Principles of Regulation

Licensing and supervision: banks require a license to operate and are supervised to ensure compliance
Market discipline: banks must publicly disclose financial information to inform depositors and creditors
Prudential requirements: regulations imposed on banks to promote safe and sound operations
Failure resolution processes: arrangements for handling distressed banks and minimizing impact on depositors and the economy

Banks and Other Financial Institutions Act (BOFIA)

Primary legislation for regulating banks in Nigeria
Gives Central Bank of Nigeria (CBN) powers to supervise and regulate banks
Covers licensing, capital requirements, liquidity, risk management, corporate governance, consumer protection, and anti-money laundering

BOFIA 2020 Highlights

Functions, powers, and duties of the CBN
Banking business: only licensed companies can engage in banking activities
Opening and closing of branches: requires CBN approval
Restructuring, mergers, and disposal of banks: requires CBN approval
Minimum paid-up share capital: CBN determines capital requirements
Revocation of license: CBN can revoke license for non-compliance with regulations
Minimum capital adequacy ratio (CAR): banks must maintain a minimum CAR
Minimum holding of cash reserves: banks must maintain cash reserves with the CBN
Disclosure of interest: directors, managers, and officers must disclose interests in credit facilities
Prohibition of interlocking directorship: restrictions on holding directorships in multiple banks
Restriction on certain banking activities: limits on lending and credit facilities
Special examination: CBN can investigate banks and specialized banks
Intervention powers in failing banks: CBN can take control of failing banks
Resolving systemic banking crisis: CBN can provide assistance to resolve crises

Other Provisions of BOFIA

Asset separation tool: CBN can transfer assets of a failing bank to a private asset management vehicle
General restriction on advertisement: unauthorized persons cannot advertise to take deposits
Prohibition of receipt of commissions: bank staff and directors cannot receive commissions for banking services
Disqualification and exclusion of certain individuals: restrictions on employment of certain individuals in banks
Offences by directors and managers: penalties for non-compliance with regulations
Penalties for offences not otherwise provided for: fine and imprisonment for non-compliance
Protection against adverse claims: Federal Government, CBN, and officers cannot be liable for actions taken in good faith
Jurisdiction of the Federal High Court: exclusive jurisdiction to try offences under BOFIA
Supremacy of BOFIA: prevails over other applicable laws
Priority of deposit liabilities: deposit liabilities have priority over other liabilities in liquidation
Power to make regulations: CBN can make rules and regulations for banks
Consolidated supervision: CBN can examine books and records of banks and affiliated entities
Corporate governance and ethics: CBN can make regulations and guidelines
Designation of systemically important banks: CBN can designate banks as systemically important
Restrictions on operations of agents of banks: CBN can regulate agents
Unclaimed funds or abandoned property: regulations for dormant accounts
Establishment of Banking Sector Resolution Fund: fund to resolve banking crises### Resolution Fund
The Resolution Fund is utilized exclusively for:
- Paying operating costs of a bridge bank
- Paying costs of transferring whole or part of a bank's business
- Providing loans or credit facilities to banks or financial institutions
- Supporting resolution measures as prescribed by the Governor

CBN Powers

The CBN has the power to:
- Manage and regulate the Resolution Fund
- Freeze a customer's account if suspected of criminal activity
- Impose and review penalties for contravention of provisions
- Grant exemptions to financial institutions from certain provisions
- Charge fees for its services

Special Tribunal

A Special Tribunal for the Enforcement and Recovery of Eligible Loans is established
The Tribunal exercises jurisdiction, powers, and authority as conferred by the Act

Other Relevant Legislation

Companies and Allied Matters Act 2020
Nigerian Deposit Insurance Corporation Act 2006
Securities and Exchange Commission Act 2007
Economic and Financial Crimes Commission (Establishment, Etc.) Act 2004
Money Laundering (Prohibition) Act 2011 (as amended)

CBN Initiatives

Introduced a new regulation in April 2023 requiring banks to have a minimum capital adequacy ratio of 12.8%
Introduced several regulations for various purposes, including financial stability and consumer protection

Prudential Guidelines

Introduced in 1990 to guide asset classification and loan loss provisioning
Revised in 2010 to address various aspects of banks' operations, including risk management, corporate governance, and loan loss provisioning

Highlights of Prudential Guidelines

Risk Management:
- Credit policy to be approved by the Board of Directors
- Limit on exposure to a single obligor or connected lending
- Credit concentration policies to identify, measure, and monitor credit risk concentrations
Exposures to Directors and Related Interests:
- Definition of significant shareholding and insiders
- Disclosure requirements for director and related interests credit exposure
Loan Loss Provisioning:
- Classification of credit facilities as performing or non-performing
- Criteria for sub-standard, doubtful, and lost credit facilities
- Provisioning rates for each category

Capital Adequacy Ratio

The minimum ratio of capital to total risk-weighted assets is 10%
Banks are encouraged to maintain a higher level of capital commensurate with their risk profile
Classification of banks based on capital adequacy ratio, with corresponding supervisory actions

Other Select CBN Initiatives

Rendition of False Returns to Regulatory Authorities
Foreign Exchange Management
Prohibition of borrowing from within the banking system to re-capitalize banks
Currency Substitution and Dollarization of the Nigerian Economy
Reporting Unethical Conduct/Whistle-blowing
Prudential Regulation for the Management of Foreign Exchange Risks of Banks
Measures to Dissuade Issuance of Dud Cheques in Nigeria
Know Your Customer (KYC) and Bank Verification Number (BVN) regulations
Consumer Protection and Financial Inclusion initiatives
Adoption of Basel Accords for banking regulation