NDIS: Nigeria Deposit Insurance Scheme (PDF)

ACCESS BANK PLC - ENTRY LEVEL TRAINING PROGRAM (ELTP) 2023 NIGERIA DEPOSIT INSURANCE SCHEME (NDIS) (CONCEPT AND PRINCIPLES OF DEPOSIT INSURANCE). At the end of this programme, participants should be able to: Understand the concept of Deposit Insurance. How NDIS act as the sa...

ACCESS BANK PLC - ENTRY LEVEL TRAINING PROGRAM (ELTP) 2023 NIGERIA DEPOSIT INSURANCE SCHEME (NDIS) (CONCEPT AND PRINCIPLES OF DEPOSIT INSURANCE). At the end of this programme, participants should be able to: Understand the concept of Deposit Insurance. How NDIS act as the safety. net that protects the Nigerian financial system. How NDIS contributes immensely to a Robust banking system that everyone has confidence in. Understand the terms, principles, structure and operations of deposit insurance as well as the functions of NDIC. At the end of the sessions,. Trainees will learn the act of creativity especially when developing financial solution for complex transactions.. Have broader and deeper understanding of deposit insurance and how it is implemented in Nigeria through the NDIC. Trainees should be appreciate key decisions and the impact they could have on supervisory scrutiny.  Course outline The course combines theory with practical exercises. It includes videos and examples to illustrate key points. PRESENTATION OUTLINE – Definition of Deposit Insurance – Rationale and Public Objectives of Deposit Insurance – Types of Deposit Insurance Systems – Design Features of Deposit Insurance Ownership Membership Coverage and Limits Funding Failure Resolution – Nigeria Deposit Insurance Scheme INTRODUCTION  Background to the course Deposit Insurance is an important element of the safety net that protects the Nigerian financial system 7 DEFINITION OF DEPOSIT INSURANCE INTRODUCTION ❑ A Deposit Insurance Scheme (DIS) is a financial guarantee to depositors, particularly the small savers, that in the event of a bank failure they will not lose all of their money. A DIS is one of the components of the financial safety net. Other components of the safety net are: Effective Regulation and Supervision; and Lender-of-last-resort facility by a Central Bank to provide temporary emergency liquidity support to solvent depository institutions. BROAD OBJECTIVES OF DEPOSIT INSURANCE 10 11 THE FINANCIAL SAFETY NET CONCEPT Strong & Robust Depositor Financial Stability Banking System Protection FINANCIAL SAFETY NET Resolution Deposit Regulation & (Lender-of-last Supervision insurance resort facility & system Treasury) Deposit insurance enhances depositor confidence DIS AND MORAL HAZARD Moral Hazard is the Moral Hazard can be mitigated by: incentive to engage in – Good corporate governance and excessive risk taking by sound risk management of individual banks and those receiving banks the benefits of deposit – effective market discipline exercised insurance by shareholders as well as by larger creditors and depositors – effective frameworks for strong prudential regulation, supervision DIS AND MORAL HAZARD… contd. ▪ specific deposit insurance design features which may include: placing limits on the amounts insured; excluding certain categories of depositors from coverage; implementing differential or risk-adjusted premium assessment systems; minimizing the risk of loss through early closure of troubled banks; and demonstrating a willingness to take legal action, where warranted, against directors and others for improper acts. Moral 15 Hazard vs Adverse Selection Adverse Moral Hazard Selection Risk Risk Insurer Insured Encourages risky Insufficient Information behaviour  CONDITIONS FOR EFFECTIVE DIS Sound and Effective Legal Regime Strong Prudential Regulation and Supervision Market disciplines Sound Accounting and Financial Reporting Regimes Comprehensive Disclosure Regimes TYPES OF DEPOSIT INSURANCE A. Implicit Deposit Insurance Scheme (IDIS) The Implicit Deposit Insurance Scheme (IDIS) is a discretionary method which monetary authorities use to prop up some failing deposit- taking financial institutions. Here the rules are made at the point of bank failure. Implicit Deposit Insurance can take the following forms: Granting of direct protection by government either in part or whole to depositors; Government could organise and financially support the merger of the problem bank with another healthy one. Such an action would prevent an outright liquidation of the problem bank and thus protect all of its depositors; and Government can prevent the failure by rehabilitating the bank. TYPES OF DEPOSIT INSURANCE (contd.) Implicit deposit insurance scheme is characterised by: Ad hoc response to bank failures Common in developing countries until recently Provides flexibility Uncertainty about level and scope of coverage  TYPES OF DEPOSIT INSURANCE (Contd.) An implicit scheme has the following merits: promotes market discipline and may lower moral hazard; prevents failure of large banks; flexible to implement due to discretion to determine level, scope and extent of protection Implicit scheme has the following short-comings: slow response to crisis due to debate on required budgetary provision; makes government to solely bare the burden of failure; may conflict with some macro-economic objectives such as price stability as more fund than initially anticipated could be injected into the system; lowers confidence in the entire banking system as there is no explicit guarantee. TYPES OF DEPOSIT INSURANCE (Contd.) B. Explicit Deposit Insurance Scheme (EDIS) An Explicit Deposit Insurance Scheme (EDIS) is created by the passage of a deposit insurance statute or private contract, which states the rules and procedures necessary for proper operation of the scheme. Here the rules are made prior to bank failures Explicit Deposit Insurance Systems have mandates ranging from the Pay- Box systems through Pay-Box with extended mandate as well as Least Cost to those with broader powers and responsibilities, which are referred to as Risk minimizers. TYPES OF DEPOSIT INSURANCE (Contd.) Explicit DIS has the following characteristics: Established by law or private contract Through premiums Specifies maximum insured amount, funding arrangement, and administrative scheme NDIC Pays It provides: Depositor certainty Clear and efficient standards for bank resolutions Ready source of funds in the event of bank failure Limit government liabilities in handling bank failure Limited because of 5m and 2m Most countries rely on explicit limited deposit insurance – 108 systems worldwide Adopted by 108 countries DESIGN FEATURES OF DIS Ownership Three types of ownership structure exist: Joint ownership by the private and the public sectors, Private ownership in which case, the scheme is purely owned by the private sector, and Public ownership where government purely holds ownership. DESIGN FEATURES OF DIS (contd.) Membership Two main types of membership: Compulsory Voluntary DESIGN FEATURES OF DIS (contd.) Participating Institutions ▪ Participation is for all deposit-taking financial institutions. ▪ Non-bank licensed deposit-taking financial institutions are included because of: The desire not to introduce competitive distortions among different types of institutions offering similar products; The objective of enhancing the stability of the financial system by including all institutions licensed to accept deposits or deposit-like products: and The desire to apply prudential, regulatory and supervisory rules to all such institutions. DESIGN FEATURES OF DIS (contd.) Foreign banks operating in Nigeria are also covered for the following reasons: ensuring the stability of the domestic financial system, providing a minimum level of deposit insurance to all depositors the notion that foreign banks benefit from a stable financial system and should therefore participate in the DIS, as part of doing business in a country. minimizing competitive issues by placing foreign banks on the same footing as domestic banks; and encouraging diversification that arises from wider membership and expansion of funding DESIGN FEATURES OF DIS (contd.) Coverage Coverage focuses on scope and limits Scope deals with type of deposits that are covered Limit deals with the amount payable by the DIS, in the event of bank failure DESIGN FEATURES OF DIS (contd.) Types of Coverage: 3 types exist: Add Jacket for Multiple Choice Blanket Coverage (All depositors, all creditors) Government does this Full Deposit Coverage; and (100% Deposits) Limited Deposit Coverage (Selected deposits) Explicit does this (Savings, Current, Fixed accounts) Limited deposit coverage is considered the best practice FDIC Deposit Insurance Coverage 28 FDIC Deposit Insurance Coverage 29 DESIGN FEATURES OF DIS (contd.) Funding Sound funding arrangements are critical to the design and operation of an effective deposit insurance system and the maintenance of public confidence. Types of Funding Ex- ante funding The funds are provided before the bank fails Ex-post funding The funds are after the bank fails Hybrid funding method DESIGN FEATURES OF DIS (contd.)… Deposit Insurance Assessment Base, Rate and Approach Assessment base can either be total deposits or insurable deposits. Assessment rate is either a flat rate, or the Differential Premium Assessment (DPAS) rate that is applied to assessment base to get total premium payable by the insured bank. The rate depends on the age of the DIS and status of the DIF vis-à- vis the emerging obligation of the DIS. DESIGN FEATURES OF DIS (contd.)… Assessment approach: Flat rate and Differential Premium Assessment System (DPAS) Advantages of Flat rate it is simple to adopt and implement; the alleged cross-subsidization within the industry may be desirable because riskier banks are less able to pay higher premium if there is no such cross-subsidization; It protects riskier banks from being easily identified by the banking public; and the information requirement for implementing the risk-based approach is enormous and the frequency with which the information changes could also be high given the dynamic nature of banking business. DESIGN FEATURES OF DIS (contd.)… Disadvantages of Flat rate Approach It is not equitable It does not give incentive to sound risk management It heightens the problem of moral hazard It makes well managed banks to subsidize weak ones. DESIGN FEATURES OF DIS (contd.)… Advantages of Differential premium assessment approach (DPAS) It is a fair and more equitable approach It encourages banks to institute sound risk management practices It mitigates the problem of moral hazard It is adjudged the best practice Disadvantages of DPAS May be difficult to implement initially Information requirement is enormous Process of classifying banks into risk buckets is complex It may have a destabilizing effects on banks as high premium rates will be applied on already troubled banks. DESIGN FEATURES OF DIS (contd.)… Fund Investment Policy The overall objective of this Investment Policy is to ensure safety and liquidity of the fund. They invest in government securities only. Bonds, etc... something with security The specific objectives are to: ✓ Provide liquidity for its deposit insurance responsibilities and meet normal operating needs ✓ Preserve capital and maximize investment returns by adopting a conservative investment policy. No risk investment for them ✓ Minimize overall risk by portfolio diversification In different investments ✓ Ensure expeditious investment of all residual cash without threatening the safety and liquidity objectives ✓ Periodically measure its investment performance against acceptable bench-marks.  EFFECTIVE FAILURE RESOLUTION Effective failure resolution mechanism is critical to sustenance of public confidence. It enhances DIS contribution to financial system stability. Effective resolution management requires a supportive legal framework. The required statutory powers could be shared amongst different safety-net participants depending on the bank closure regime of each country 36 PRINCIPLES FOR EFFECTIVE FAILURE RESOLUTION OUTLINE – Rule based or Statutory mechanism/triggers for early intervention CAR - Capital Adequacy Ration of 10% – Authority to decide Resolution methods/options – Professional evaluation of a failing bank – Establishment of effective resolution policies and procedures – Maximise recovery Through bidding – Ensure transparency & accountability – Provide incentives for market based resolution Try selling within same industry - even take over – Ensure speedy reimbursement to insured depositors – Define guiding rule of Liquidation – Lets discuss the principles 37 PRINCIPLES FOR EFFECTIVE FAILURE RESOLUTION (CONTD.) Rule-based or statutory legal mechanism for early intervention Rule-based approach Vs. Discretionary approach – Establish rule-based statutory triggers – Communicate trigger criteria CAR – Criteria should comprise quantitative and qualitative measures 38 PRINCIPLES FOR EFFECTIVE FAILURE RESOLUTION (CONTD.) Rule-based or statutory triggers for early intervention (Cont’d) Quantitative Measures Regulatory Capital Asset Quality Liquidity profile Multiple choice possibility Qualitative Measures Management quality Unsound business and financial practices Violation of rules and regulations 39 PRINCIPLES FOR EFFECTIVE FAILURE RESOLUTION (CONTD.) Authority to decide on Resolution Method/Option Asset Purchase (AMCON - Asset Management C of Nigeria) Bad loans are called toxic assets Open Bank Assistance Assisted or Market determined Merger Reimbursement/Deposit payout More of the same Purchase & Assumption Bridge Bank NDIC just changes the name, board etc... when good they sell it 40 PRINCIPLES FOR EFFECTIVE FAILURE RESOLUTION (CONTD.) ❖ Professional Evaluation of a failing bank – Experienced professional staff of DI/or external experts should assess viability of troubled bank. – Evaluation criteria to include market value – Workout/Turn-around Plan (TAP) where applicable, should be well designed and achievable 41 PRINCIPLES FOR EFFECTIVE FAILURE RESOLUTION (CONTD.) ❖ Establish Effective Resolution Policies and Procedures – Seek to minimize resolution cost – Avoid disruption of banking services – Contingency plan for systemic repercussions or unanticipated developments ❖ Maximize Recovery of Assets To make enough money to settle debt of not insurance funds – Sell assets through competitive bids – Adopt sale by private treaty as unavoidable option – Use services of real estate agents 42  PRINCIPLES FOR EFFECTIVE FAILURE RESOLUTION (CONTD.) ❖ Ensure Transparency & Accountability in Failure Resolution – Obtain support/assistance of other safety net participants Let the CBN know – Ensure internal and external audit of resolution process The accountants among you – Adopt cost-effective approach ❖ Provide Incentives for Market-based Resolution – Tax incentives for M & A and bad debts write - offs – Administrative incentives – compromise debt or interest waivers. 43 PRINCIPLES FOR EFFECTIVE FAILURE RESOLUTION (CONTD.) ❖ Ensure Efficient Insured Depositor Reimbursement – Minimize period between bank closure and deposit payout (BOFIA recommended 30 days) – Continuous communication with the public during deposit payout and liquidation – Ensure access to depositor records before bank closure – Legal rules regarding set-offs and subrogation rights should be well defined – Criteria for partial (or advance) payment of insured deposits should be well defined. ❖ Guiding Rules of Liquidation should be well defined. Rules should include: – Priority of claims. Is depositor preference justifiable? Who depositors or creditors/ shareholders – Subrogation right of DI – Set – off rules – Deadlines for reimbursement – Reporting duties of liquidator 44 REQUIRED LEGAL POWERS FOR EFFECTIVE FAILURE RESOLUTION OUTLINE: – Clearly defined mandate (Risk minimizer) – Clearly defined funding mechanism Where they will get money – Authority over membership Compulsory or Voluntary – Authority to have access to information Wrong info = fine – Statutory mechanism for resolving Systemic Banking crisis – Legal protection for Directors/officers of a DI Nobody can sue them – Authority to prosecute Directors/Officers/ Auditors of failed insured institutions 45  EFFECTIVE FAILURE RESOLUTION (contd.): REQUIRED LEGAL POWERS ❖ Clearly defined funding mechanism – Deposit Insurance Fund ❖ Clearly defined mandate – Pay box – Pay box with extended mandate – Least cost (Loss minimizer) – Risk Minimizer ❖ Authority over membership – Accept or reject new members – Terminate insurance status – Coordinate timing of termination prior to bank closure – Control moral hazard – Membership selection Vs. mandatory coverage 46 EFFECTIVE FAILURE RESOLUTION (contd.): REQUIRED LEGAL POWERS ❖ Authority to have access to information Conduct on-site appraisals Oblige to requests Conduct due diligence on assets/liabilities Access to depositor records before bank closure ❖ Statutory Mechanism for Systemic Banking Crisis Provision of blanket guarantee for specified period Suspension of least-cost requirements Access to public funds, if need be 47 EFFECTIVE FAILURE RESOLUTION (contd.): REQUIRED LEGAL POWERS ❖ Legal Protection for Directors/Officers of DI (It's like you're prosecuting CBN or NDIC) – Immunity from civil/criminal liability for actions/decisions taken in good faith – Payment of legal costs of Directors/Officers indemnified. (Example: Law suits by uninsured creditors). ❖ Authority to Prosecute Directors/Officers and Auditors of Failed Banks – Explicit legal process for prosecution – Should deposit insurer directly handle prosecution or use law enforcement agencies? – Promote sound governance of banks through effective prosecution. – Any need for special courts or tribunals for failure resolution cases? 48  PART II OPERATIONS OF NIGERIA DEPOSIT INSURANCE CORPORATION ………..Protecting your bank deposits The Nigeria Deposit Insurance Corporation Establishment and Operations Degree because of military era ▪ The NDIC was established originally by Decree No. 22 of 1988 ▪ It was established to insure the deposit liabilities of all licensed banks and such other deposit taking financial institutions operating in Nigeria ▪ The NDIC Act was re-enacted in 2006 to give the Corporation more powers  The NDIC (contd) Rationale for its establishment ▪ In 1977 a review of the financial system was undertaken. One of the recommendations was the need to set up for Nigeria, a Deposit Protection Fund, to ensure that depositors are no longer exposed to the risk of losing all their money in the event of bank failure ▪ It was also intended to further assist in inculcating banking habits in the people ▪ The review also recommended a regime of free entry and free exit for banks because, as at that time, banks were not allowed to fail while the rules for entry into banking business were too stringent. As at end of 1984, there were no more than 24 banks operating in Nigeria. ▪ Subsequent to that review, the financial system entered the era of liberalisation and de- regulation accentuated by the Structural Adjustment Programme that was introduced in September, 1986. Deposit Protection Fund ▪ The SAP gave additional impetus to the establishment of the DPF, which was later Christened NDIC. ▪ Arising from liberalisation and deregulation of the financial system, the number of licensed banks rose to 120 in 1990 from 24 in 1984 ▪ The NDIC was established in June 1988, but commenced operation in March 1989.  NDIC: Functions… (Section 3 NDIC ACT, 2023) Insuring all deposit liabilities of licensed banks and such other deposit taking financial institutions operating in Nigeria….. To engender confidence in the Nigerian banking system Giving assistance to insured institutions in the interest of depositors, in case of actual financial difficulties, particularly where suspension of payment is threatened, to avoid damage to public confidence in the Nigerian banking system; AMCON helps with collecting bad loans Guaranteeing payments to depositors, in the case of imminent or actual suspension of payments by insured institution up to the maximum amount as provided for under the Act; Assisting monetary authorities in the formulation and implementation of banking policy so as to ensure sound banking practice and fair competition among insured institutions in the country; and NDIC: Functions Pursuing any other measure necessary to achieve the functions of the Corporation provided such measures and actions are not repugnant to the objects of the Corporation NO PERSON OTHER THAN THE CORPORATION SHALL INSURE DEPOSIT LIABILITIES OR GUARANTEE PAYMENTS TO DEPOSITORS OF INSURED INSTITUTIONS OPERATING IN NIGERIA. NDIC: Ownership The NDIC is owned by the Federal Government of Nigeria. Its Capital fund was subscribed to by: Central Bank of Nigeria - 60% Federal Ministry of Finance - 40% ▪ It is a body corporate with perpetual succession Continue forever ▪ It may sue and be sued in its corporate name Not MD or personal name ▪ It shall not be placed in liquidation except pursuant to the provisions of a law or enactment. ▪ It is governed by a BOARD OF DIRECTORS NDIC: Membership of Deposit Insurance Scheme Membership of NDIC is compulsory. All licensed banks and such other financial institutions in Nigeria, engaged in the business of receiving deposits shall be required to insure their deposit liabilities with the Corporation. ▪ The NDIC can terminate a bank’s insured status with concurrence of CBN CBN first revokes license then NDIC takes over ▪ As at today all the licensed banks, Microfinance Banks (MFBs), Primary Mortgage Institutions (PMIs) and Non-Interest Banks Islamic banks operating in Nigeria are insured ▪ Mobile Money Operators(MMOs) are insured 5m limit other ones are 2m ▪ Payment Service Banks are also insured MTN 55 NDIC: Deposit Insurance Coverage- Maximum Claim – Deposit Insurance targets small savers. The maximum claim is N500,000 per depositor of DMB, PMI, MMO (Mobile money operators), PSB and N200,000 per depositor of MFB. (Sect. 25, NDIC Act, 2023) PMI – The board has power to review upward the maximum amount which a depositor can receive in the event of revocation of a bank license. – At inception of DIS, the maximum amount payable per depositor was N50,000. It was later reviewed to N200,000 56  NDIC: DIS Coverage- Maximum Claim (contd.) ▪ All accounts held in the same capacity and right in one failed bank shall be merged and treated as one account. This is what you get later after selling their assets, which is not insured ▪ However, liquidation dividends shall be paid to depositors that have more than the insured amount of deposit once the assets of the failed institution are realized. Now 30 days ▪ Depositors are expected to be paid not more than 90days from the date a bank was closed …… the NDIC is still grappling with this requirement NDIC: DIS Coverage- How effective? At N500,000 per depositor of banks, the number of depositors fully covered as a ratio of total depositors stood at: 2011 97% 2012 95% 2013 97% 2014 97% 2022 97%... Suffices to state that coverage had ranged between 95% and 98% in the last 10 years 58 NDIC: Coverage- Liquidation Dividends This also includes the shareholders Aside the insured amounts, liquidation dividends are paid to the uninsured depositors from the proceeds of sale of assets and recovered debts of the failed banks With such payments, it is possible for depositors of some banks to recover their deposits in full while some others recovered substantial parts of their deposits in the failed banks. Some shareholders have also been paid These are paid last NDIC: Funding The funds of the Corporation consists of: ▪ Capital contribution by CBN and FMF ▪ Assessed premiums paid by the insured institutions ▪ Income from investments The Corporation can borrow money from sources approved by the Board. NDIC: Funding The Corporation has powers to invest its funds in Federal Government Securities and such other securities as approved by the board: ▪ Currently, the NDIC invests only in Federal Government securities. ▪ The cost of running NDIC is defrayed from the income generated from the investments NDIC: Funding- premium assessment- Insurable deposits All deposits of a licensed bank or such other financial institution shall be insured except the following: Insider deposits, i.e, deposits of staff including directors of the insured institutions Counterclaims from a person who maintains both deposit and loan account… the deposit serving as collateral for the loan Any other deposit specified by the board NDIC: Funding-Premium Assessment In computing premium payable, the NDIC requires banks to submit approved auditors certified statement of deposit liabilities as at 31st December of the preceding year. Before the adoption of Differential Premium Assessment System, the NDIC computed premium at a flat rate. 63 NDIC: Funding- Premium Assessment-Deposit Insurance fund The premium contributed by the insured banks accumulates to form the Deposit Insurance Fund (DIF). The NDIC has created Four (4) separate DIFs – one for each category of insured institutions: – DIF for the Deposit Money Banks – SIIF for the Special Insured Institutions Funds-MFB/PMIs – NIDIF for Non-interest deposit-taking Financial Institutions – PSDIF for Payment Savings Deposit Insurance Fund. NDIC: Funding- Premium assessment NDIC has adopted the Differential Premium Assessment System to determine the premium payable by all insured institutions. There is a base rate of 0.35 of 1%, to which is added some extra charges, reflecting the riskiness of the respective bank’s operations. These add-ons are graduated and can be up to.30 of 1%. Together with the base rate, a poorly managed bank can pay a maximum of 0.65 of 1% as premium, where a very well managed bank pays only the base rate of.35 of 1% 65 NDIC: Funding- DIF As at 31st March 2022*** – DIF stood at =N=1.515 trn – SIIF, =N=139.576 billion; and – NIDIF was =N=17 bn – PSDIF 1.2m The DIF is used to reimburse depositors of insured financial institution in the event of failure. The robustness' of the DIF and its management determine the extent to which the deposit insurer can play that role. Funding for NDIC is done ex-ante NDIC: Effective Supervision The Corporation has power to require information from any person or insured institution to give effect to its risk minimization status. It is an offence not to supply the information as required. The NDIC has powers to appoint Examiners who will periodically, and under conditions of secrecy, examine the books and affairs of every insured institution – It has access at all times to the books, records and accounts of any insured financial institution – It can require and obtain information and explanations from officers, directors and auditors of an insured financial institution NDIC: Effective Supervision (contd.) Bank supervision is carried out in two broad ways: – Off- site Surveillance Report you have sent – On site examination Their staff come to your premises The NDIC collaborates extensively on supervision matters with the CBN Currently NDIC conducts joint on-site examination of banks with CBN as follows: – Risk Based Supervision – Risk assets assessment These are the areas they do together MCQ possibilities – Forex Examination NDIC: Effective Supervision (contd.) The Supervision of banks is carried out : – On a single entity basis – individual institution Can be called Micro – On a consolidated basis- group basis; and – On Macro prudential basis – System wide. The NDIC and CBN hold regular meetings to discuss matters affecting banks and banking system under the auspices of CBN/NDIC Executive Committee on Supervision NDIC: Effective Supervision (contd.) The NDIC is a member of the Bankers’ Committee’s Sub-Committee on Ethics and Professionalism. This committee seeks to encourage the banking public to have something akin to public complaint bureau to which bank customers can report their banks or bank reports other banks for unprofessional conducts. Like Zenith not providing something to Access The findings and decisions of this sub-committee are reported to the Bankers Committee for ratification and implementation. All of these are done to sustain depositors’ confidence in the banking system NDIC: Provision of financial and technical assistance The NDIC provides liquidity support to banks that are ordinarily well managed but face liquidity difficulties arising from: – Asset- liability mismatches or, – Find themselves in such positions because of Government policies E.g. CBN CRR pronouncements or TSA Treasury Single Account recalling all FGN related deposits to the CBN. The NDIC did grant financial support in the past… but most banks shy away from such request because of perceived implication……That they could be viewed as distressed. Instead, banks opt for the lender of last resort….. CBN or interbank for emergency bail out Technical support involves a change of management by the regulators NDIC: Prompt payment of guaranteed sum The speed with which depositors of failed banks are paid the insured sum is very important to sustain public confidence in the banking system. It is also a function of the failure resolution option adopted by the NDIC. The NDIC had used various options in the past ranging from pay out, through Purchase and Assumption to the bridge bank. Shell company, license it, run for 48month and sell These options are discussed under failure resolution. Suffice it to state here that the fastest option is the bridge bank option. Depositors of failed banks are expected to be paid within 30 days from the concurrence of CBN (Sect. 28, NDIC Act 2023) NDIC: Orderly resolution of failed insured financial institutions When a bank is failing, the CBN in conjunction with NDIC can take action to salvage it by using a combination of therapies: Impose Holding Actions on the bank Provide financial support; and/or Remove management Constantly monitor the bank to ensure its survival  NDIC: Failure Resolution Options Deposit Payout Option Under this option, the license of a bank is revoked, the NDIC moves in and takes over the management of the bank for winding up and liquidation with the concurrence of the CBN as It seeks to create: 1. the deposit register, which is a list of all depositors of the bank and the balances on their respective deposit accounts. 2. A register each, for all classes of assets, their locations, and liabilities It takes effective custody of all important documents of the bank. NDIC: Failure Resolution- Payout Option (contd.) The NDIC proceeds to pay depositors of the failed bank up to the insured amount; and simultaneously begins the processes of winding up and liquidation including – Sale of all the assets of the bank Recovery of the debts/loans owed the bank Application of proceeds to pay liquidation dividends to all uninsured depositors Paying other claimants The process is tedious and time consuming. Bank depositors have had to wait indefinitely for payment. NDIC: Failure Resolution (contd.) Purchase and Assumption Option When a bank’s license is revoked, the NDIC (With concurrence of CBN) moves into the bank to take effective possession and creates all the registers and takes effective custody of all documents as in Deposit Pay Out. Thereafter, it invites all existing banks to bid for the closed bank’s deposits and assets. – Under this option, each of the bidding banks would be required to take over all the deposit liabilities of the failed bank and select any asset- properties, loans, chattels etc that it would like to take over from the failed bank to reimburse itself for the deposit it is assuming NDIC: Failure Resolution (contd.) - Purchase and Assumption Option (contd.) The value of the selected assets are agreed upon. The assets are deemed to be purchased by the successful bidding bank The value of the assets is deducted from the total deposit assumed by the bank. The balance is paid to the deposit assuming bank. Deal concluded. The NDIC thereafter proceeds to sell the remaining assets, recover debts/loans and use the proceeds to settle other claimants  NDIC: Failure Resolution Contd.) - Purchase and assumption Option (contd.) Meanwhile, with the transaction concluded, the assets purchased, and all the depositors of the failed bank are transferred to the assuming bank Although time could be lost during the process, the depositors of the failed bank do not lose any money. They resume banking transactions in the assuming bank once documentation is concluded  NDIC: FAILURE RESOLUTION (contd.) BRIDGE BANK OPTION When a bank begins to show symptoms of distress and it has crossed the specified thresholds of Capital inadequacy or other regulatory parameters without any hope of immediate restitution by the owners and managers, the regulatory authorities could, in the best interest of the banking system, the economy and indeed, the depositors, opt for the bridge bank option. The CBN, having agreed with the NDIC, the NDIC incorporates a shell company. Why?  NDIC: Failure Resolution (contd.) - The Bridge Bank Option (contd.) The CBN revokes the license of the failed bank and simultaneously issues a new banking license to the shell company to start a new bank The new bank, the bridge bank, assumes all the assets and liabilities of the failed bank. The bridge bank is nurtured and managed to good health and sold to new investors by the regulatory authorities. With the sale to new investors, the bridge is broken as it is no longer owned by the regulators. A bridge bank is an interim bank Nobody owns it If after 18 months or 2 years the bank’s condition failed to improve, it would be liquidated. If it does improve, there will be willing buyers. Can you give three examples of bridge banks in Nigeria? What happened to them?  NDIC: Failure Resolution (contd.) - The Bridge Bank Option (contd.) The bridge bank option is rated the fastest and most effective option of failure resolution, if done timeously. Except for the change of name and media hype, the general public may not even know that something serious has happened to their bank. Banking transactions continue seamlessly, without any break… no time is lost. Little or no apprehension at all. NDIC- Concept of Deposit Insurance- conclusions The NDIC has operated largely in compliance with the Core Principles for Deposit Insurance It has continued to improve on its activities and in the delivery of its core mandate. The NDIC is a Deposit Insurer of repute in the global community of Deposit Insurers 84