Access Bank SBE Trainee Manual 2023 PDF

ACCESS BANK SBE TRAINEE MANUAL, OCTOBER 2023 BANKING REGULATION AND SUPERVISION 1 MODULE 1 1. Introduction to banking regulation Definition of banking regulation A historical overview of banking regulations in Nigeria Why Banks...

ACCESS BANK SBE TRAINEE MANUAL, OCTOBER 2023 BANKING REGULATION AND SUPERVISION 1 MODULE 1 1. Introduction to banking regulation Definition of banking regulation A historical overview of banking regulations in Nigeria Why Banks are heavily regulated Key regulatory agencies 1.1. Definition of Banking Regulation Banking regulation refers to the laws made by Nigeria’s federal legislature, (National Assembly) and subsidiary legislations (Regulations, Guidelines, Directives etc) made by appropriate regulatory authorities including the Central Bank of Nigeria (CBN), and Nigeria and Deposit Insurance Corporation, pursuant to such laws. 1.2. History of Banking Regulation in Nigeria Banking regulation started with the promulgation of the Banking ordinance of 1952. This was followed by the CBN Act of 1958. The CBN did not commence operation until 1959. The CBN Act has witnessed two major amendments in 1991and 2007. 1.2.1 Historical Overview of Banking Regulation (1892 to date) In the history of banking regulation in Nigeria, the following periods are distinct. ERA OF FREE BANKING - The period, 1894 to 1952 has been described as the era of free banking due to the total absence of regulation. There was no control and no regulation for the emerging banking system. There was free entry and free exit. Consequently, many banks failed and depositors lost money as there was no protection for them. ERA OF REGULATION 1952 To date: Banking regulation started earnestly in 1952 with the enactment of the Banking Ordinance which, among others, introduced licensing and minimum paid up capital requirements for banks. In 1958, the Central Bank of Nigeria Act was enacted. It vested considerable institutional powers on the Bank to, among others, Issue legal tender currency and promote a sound financial system in Nigeria. It commenced operations in 1959. The Banking Act (1968), codified the rules and regulations guiding the business of Banking in Nigeria. It presented the first comprehensive attempt at institutionalising a standard regulatory and supervisory framework for the Nigerian Banking System. ERA OF INDIGENISATION AND NATIONALISATION (1972-1976): The Nigerian Enterprises Promotion Act (Decree) of 1972, compelled the participation of 2  Nigerians and the Federal Government in the acquisition of controlling equities of foreign banks. ERA OF LIBERALISATION (1984-1992) - By 1984, the number of banks operating in Nigeria was 24. There was the notion that Nigeria was under-banked. Liberalisation entailed removing some very stringent rules and regulations that negated the principle of free entry and free exit. Liberalisation also led to the establishment of the deposit protection Scheme in 1988 to handle the consequences of bank failures. By the end of 1992, the number of licensed banks operating in Nigeria had risen to 120. The Banks and Other Financial Institutions Act (BOFIA) was enacted in 1991. It was a further attempt by government to strengthen the financial sector’s regulatory and supervisory structures. The Prudential Guidelines (1990), as the basis for asset classification, loan loss provisioning and Income recognition also came into force. So, also was the implementation of Basle 1 Capital Adequacy computation framework. Nigeria Deposit Insurance Corporation was established, in 1988 to insure the deposit liabilities of banks and handle issues pertaining to bank failure. Consequently, it was easy to take out distressed banks from the system. It started operations in 1989. ERA OF BANK CONSOLIDATION (2004 to 2009): In June 2004, the Banking Consolidation program was initiated by the Central Bank. The core of the program was the large increase in the minimum capitalization requirements for banks operating in Nigeria from =N=4billion to =N=25 billion. By 31st December 2006, 25 banks emerged from the then existing 89 banks. The CBN subsequently, from 2009, engaged in stress testing and further restructuring of the banking system to assure the integrity of the banks. It revoked the universal banking structure and introduced the Holding Company structure for the banks. 1.3 Why are banks subject to severe regulation? To prevent systemic financial crises thus ensuring stability of the banking system. To safeguard the deposits of individual customers, and sustain public trust and confidence in banks. To prevent money laundering and other financial crimes To ensure that banks maintain sufficient liquidity and capital to meet their obligations. To protect consumers from fraudulent activities, unfair practices, and mismanagement of their funds. To implement robust risk management practices To control interest rates and lower cost of borrowing 3  To guide how banks allocate credit to different sectors of the economy To establish and maintain deliberate monetary policy actions. To maintain stability in the foreign exchange market, which is crucial for international trade and investment. To maintain international best practice in discharge of banking activities, including establishing sustainable risk-management practices such as the COSO Framework for Enterprise Risk Management and the Basel Accords. 1.4. REGULATORS OF THE NIGERIAN BANKING INDUSTRY. DIRECT REGULATORS 1.4.1. The Central Bank of Nigeria (CBN) is the apex institution set up to supervise banks and generally to manage the Nigerian financial system. It was established in 1958 with the following principal objectives – (a) ensure monetary and price stability; (b) issue legal tender currency in Nigeria; (c) maintain external reserves to safeguard the international value of the legal tender currency; (d) promote a sound financial system in Nigeria; and (e) Act as banker and provide economic and financial advice to the Federal Government. (f) Determine by a suitable mechanism The exchange rate of the Naira shall. (g) sole right of issuing currency notes and coins throughout Nigeria. (But requires the approval of the President to redenominate currency notes and coins) (h) arrange for the printing of currency notes and the minting of coins; issue, re-issue and exchange currency notes and coins; etc. (i) request for and share information on matters affecting the economy (j) handle local and foreign business of the Federal Government and (k) act as banker to other banks and to seek co-operation of those banks in performing its functions under the Act. Banks are supervised by the CBN in collaboration with NDIC, while the CBN exclusively supervises other financial institutions i.e. Finance companies, Bureaux de change, Mortgage institutions and Discount houses. 4 1.4.2. Nigeria Deposit Insurance Corporation (NDIC): compliments the regulatory and supervisory role of the CBN by insuring customers’ deposits. It was established in 1988 but commenced business in March 1989. Deposit insurance is a financial guarantee which ensures that bank depositors would not lose all their money if an insured financial institution fails. Section 2 of the NDIC Act, 2006 stipulates the corporation’s functions as follows: ▪ Insuring all deposit liabilities of licensed banks and such other financial institutions operating in Nigeria; ▪ Giving technical or financial assistance to insured institutions; ▪ Guaranteeing payments to depositors in case of imminent or actual suspension of payments by insured institutions up to the maximum amount as provided for in Section 20 of the Act. ▪ Assisting monetary authorities in formulating and implementing banking policy; and ▪ Supervision of insured financial institutions aimed primarily at protecting depositors. This responsibility is shared with the CBN. ▪ Structuring liquidation of insured institutions as a last resort to ensure orderly and efficient liquidation of failed financial institutions whose licenses have been revoked by the CBN ▪ Ensuring that the assets of the failed insured financial institution are realized in the most cost-effective manner and the proceeds appropriated among various claimants in accordance with relevant laws. INDIRECT REGULATORS OF THE BANKING INDUSTRY 1.4.3 Federal Ministry of Finance (FMF) The Federal Ministry of Finance is primarily in charge of fiscal policy (financial matters including tax revenue) of the Federal Government. Between 1960 and 1965, banking supervision was a shared responsibility between the CBN and FMF. CBN handled off- site supervision while FMF was in charge of on-site supervision (on bank premises) at that time. The NDIC, SEC, NAICOM, Customs and FIRS, among others, are also under the supervision of FMF. 1.4.4. Securities & Exchange Commission (SEC) This is the apex regulatory authority for the capital market and it is responsible for registering all eligible securities offered in the capital market as well as Stock Exchanges, Issuing Houses and Stockbroking firms. It registers and regulates stock exchanges, over the counter transactions (OTC) and any other recognized investment exchanges. 5 It monitors the capital market to ensure strict compliance with the requirement of just and equitable dealings. It approves and regulates mergers and acquisitions (M&A) and authorizes the establishment of Unit Trusts also referred to as mutual funds (i.e. investment companies that use members' capital to buy a diverse group of stocks from other companies). 1.4.5. Economic & Financial Crimes Commission (EFCC) Section 6 of the EFCC Act stipulates that the Commission is responsible for- (b) the investigation of all financial crimes including advance fee fraud. Money laundering, counterfeiting, illegal charge transfers, futures market fraud. Fraudulent encashment of negotiable instruments, computer credit card fraud, contract scam, etc.; (c) the co-ordination and enforcement of all economic and financial crimes laws and enforcement functions conferred on any other person or authority; (d) the adoption of measures to identify. trace, freeze, confiscate or seize proceeds derived from terrorist activities. economic and financial crime related offences or the properties the value of which corresponds to such proceeds; n) the co-ordination of all existing, economic and financial crimes investigating units in Nigeria 1.4.6. National Drug Law Enforcement Agency (NDLEA) The NDLEA was established in 1995 in order to identify and locate narcotic drugs and psychotropic substances, proceeds, property, objects or other things related to the commission of an offence under the Money Laundering Act, 1995. It is empowered to: ▪ Place any bank account and account comparable to a bank account under surveillance ▪ Place under surveillance or tap any telephone line ▪ Have access to any computer system ▪ Obtain communication of any authentic instrument or private contract, together with all bank, financial and commercial records. The main objective of the NDLEA is to interdict, investigate and prosecute cases of money laundering arising from illicit dealings in drug. 6 1.4.7. Each of these regulatory institutions listed is a product of statute i.e. created by law. For example: the Central Bank of Nigeria was created by the Central Bank of Nigeria (CBN) Act, (as amended in 2007) which specifies its structure, powers and responsibilities. Companies and Allied Matters Act, 1990 as amended created & empowered the Corporate Affairs Commission; Nigeria Deposit Insurance Corporation (NDIC) was also created & empowered by the NDIC Act. These bodies are empowered to make rules, regulations or issue Guidelines which impact how banks may carry out their functions. The objective and impact of effective regulation and supervision is to promote stability in the banking system by ensuring a safe and sound operation by the banks When the powers conferred by these laws are exercised, they result in issuance of Regulations, Circulars, Letters and Administrative directives which also constitute “law” and which must be complied with by each regulated body. These laws, rules, guidelines, circulars and administrative directives are so many that it is impossible to master them all, mainly because there are multiple bodies empowered to make them for a variety of purposes. Sometimes, there is duplicity and occasionally, conflicts. Harmonizing them became inevitable. This led to the creation of the Financial Services Regulation Coordinating Committee (FSRCC). The members of the FSRCC are CBN (Chairman), Securities and Exchange Commission (SEC), National Insurance Commission (NAICOM), Corporate Affairs Commission (CAC), Federal Ministry of Finance (FMF) and Nigeria Deposit Insurance Corporation (NDIC) & National Pensions Commission (PENCOM) as provided for in CBN Act 2007. The Nigerian Stock Exchange (NSE) has observer status. The objectives of the FSRCC are: ▪ To make for a coordinated supervision of financial institutions; ▪ To reduce arbitrage opportunities usually created by differing regulatory and supervisory standards among regulatory authorities; ▪ To deliberate on problems experienced by any member in its relationship with any financial institution; ▪ To eliminate information gaps encountered by any regulatory agency in its relationship with any group of financial institutions; ▪ To articulate strategies for the promotion of safe, sound and efficient practices by financial intermediaries 7 INTERNATIONAL REGULATORS: 1.4.8. Basel Committee on Banking Supervision (Basel Committee) The Basel Committee On Banking Supervision was established at the end of 1974 by the G10 countries--Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States--along with Switzerland and Luxembourg under the auspices of the Bank for International Settlements (BIS). Its origins can be traced to June 26, 1974, when German regulators forced the troubled Bank Herstatt into liquidation. That day, a number of banks had released payment of German marks to Bank Herstatt in Frankfurt in exchange for US dollars that it was to deliver in New York. Because of time-zone differences, Bank Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their dollar payments. The cross–jurisdiction implications of this event precipitated its establishment. The central aim of the new committee was to provide a "forum for regular cooperation between member countries on banking supervisory matters" and improving the "quality of banking supervision worldwide.” Crucially, the committee “does not possess any formal supranational supervisory authority, and its conclusions do not, and were never intended to have legal force.” Basel Accords In the 1980s, the committee's work increasingly focused on issues of bank capital adequacy. That led, in 1988, to the Basel Accord on capital requirements (Basel I). It was "motivated by two interacting concerns--the risk posed to the stability of the global financial system by low capital levels of internationally active banks and the competitive advantages accruing to banks subject to lower capital requirements" Basel II Accord In 1998, the committee began to revise the Basel Accord to address banking risks beyond credit risk, paving the way for the issuance of a revised Basel framework-- Basel II--in June 2004. Basel II divided bank regulation into three pillars: Pillar I: Minimum capital requirements (addressing risk and expanding Basel l) Pillar II: Supervisory review (regulatory supervision and risk management). This is a regulatory response to the first pillar, giving regulators better 'tools' over those previously available. It also provides a framework for dealing with systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk which the accord combines under the title of residual risk. 8  Pillar III: Market Discipline - This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to measure the capital adequacy of an institution. ▪ This supplements regulation as sharing of information facilitates assessment of the bank by others, including investors, analysts, customers, other banks, and rating agencies, and that leads to good corporate governance. ▪ The requirement of public disclosure of financial and other information enables all stakeholders to assess the level of risk of banks and to make investment decisions. ▪ They can thus distinguish properly managed banks which they would reward with their patronage. Basel III Accord The 2007-2009 global financial meltdown prompted the Basel Committee to once again revise its Accord on capital requirements, placing a new emphasis on the importance of liquidity standards. In December 2010, the committee issued new global regulatory standards Basel III to limit the kind of risk-taking which had precipitated the crisis, and which the original two Basel Accords had failed to prevent. As Levinson notes in his Foreign Affairs essay, "Inadequate capital is only one of the problems that can beset a financial institution during a crisis. Some institutions that seemed well positioned when the recent crisis struck suffered not from a lack of capital but from a lack of ready cash” (i.e. Liquidity) 9 Basel’s core principles for effective banking supervision The Basel Committee’s standard principles for the regulation/supervision of banks (29 Core Principles for Effective Banking Supervision) is a framework with four distinct arrangements as follows: 1. Legal and institutional structure for the implementation of public policy (general public principles that influence legislations aimed at promoting public interest over individual rights) with respect to the financial services sector; 2. Regulatory structure regarding the formulation of laws, prescriptions, guidelines or directives applicable to banking institutions (e.g. entry requirements, capital requirements, accounting and disclosure provisions, risk management guidelines); 3. Supervisory structure to ensure that rules and regulations are adhered to. 4. Safety net arrangement - for the handling of liquidity and solvency difficulties that can affect individual banking institutions or the banking system as a whole and for the sharing of financial losses that can occur (e.g. deposit insurance scheme or winding-up procedures). Nigeria is largely compliant with these Core Principles. 1.4.9. The IMF and the World Bank The International Monetary Fund (IMF) and the World Bank are institutions in the United Nations system. They share the same goal of raising living standards in their member countries. Their approaches to this goal are complementary, with the IMF focusing on macroeconomic issues and the World Bank concentrating on long-term economic development and poverty reduction. The International Monetary Fund and the World Bank were both created at an international conference convened in Bretton Woods, New Hampshire, United States in July 1944. The goal of the conference was to establish a framework for economic cooperation and development that would lead to a more stable and prosperous global economy. While this goal remains central to both institutions, their work is constantly evolving in response to new economic developments and challenges. MODULE TWO: FUNDAMENTALS OF BANKING REGULATION Definitions 2.1. “Regulation” means: ▪ Rule or order: an official rule, law, or order stating what may or may not be done or how something must be done. 10  ▪ Government order with force of law: an order issued by a government department or agency that has the force of law. ▪ Basically, regulation means setting standards. 2.2. “Supervision” means: ▪ To watch over an activity or task being carried out by somebody and ensure that it is performed as required. ▪ To be in charge of or watch over a group of people engaged in an activity or task and keep order or ensure that they perform it correctly 2.3. Importance Of Regulation Banking regulations are important for protecting consumers, promoting financial stability, and preventing financial crime. While regulations can impose costs on banks, they also help to create a more stable and efficient financial system. When regulations change, the bank's operational framework must adapt for a number of reasons. o To comply with the law. Banks are required to comply with all applicable laws and regulations. When regulations change, banks must adapt their operational frameworks to ensure that they are still in compliance. o To reduce risk. Regulations are often designed to reduce risk in the financial system. For example, regulations may require banks to hold more capital or to limit their exposure to certain types of assets. By adapting their operational frameworks to comply with new regulations, banks can reduce their risk profile. o To improve efficiency. New regulations can sometimes create new opportunities for banks to improve their efficiency. For example, a new regulation that requires banks to collect more data about their customers could also create an opportunity for banks to improve their marketing and risk management practices. o To remain competitive. In a competitive banking environment, it is important for banks to be able to adapt to changes in the regulatory landscape. Banks that are able to adapt quickly and efficiently to new regulations will be better positioned to compete in the market. Here are some specific examples of how banks might adapt their operational frameworks in response to regulatory change: o A bank may need to change its lending policies to comply with new capital requirements. o A bank may need to implement new systems and procedures to comply with new anti-money laundering regulations. 11  o A bank may need to change its data collection and storage practices to comply with new data privacy regulations. o A bank may need to develop new products and services to meet the needs of customers who are affected by new regulations. o By adapting their operational frameworks to regulatory change, banks can protect themselves from risk, improve their efficiency, and remain competitive. 2.4. General Principles of Regulation Regulation usually focuses on the following areas: ❖ Licensing and Supervision: Banks usually require a banking license from a bank regulator, in the case of Nigeria, CBN, before they can engage in banking business. The regulator supervises licensed banks for compliance with the requirements and responds to breaches of the requirements by obtaining undertakings, giving directions, imposing penalties or, ultimately, revoking the bank’s license ❖ Market Discipline: The regulator requires banks to publicly disclose financial and other information so that depositors and other creditors better informed about the business of the bank and can use this information to assess the level of risk to enable them to make investment decisions. ❖ Prudential requirements: Requirements are imposed on banks in order to promote the objectives of the regulator. Often, these requirements are closely tied to the level of risk exposure for specific sectors of a bank. Some of the most important requirements include maintaining minimum capital ratios, Minimum Liquidity Ratio, Loan to deposit ratio, Single Obligor Limits, Ratio of non- performing loans to total loans etc. ❖ Failure Resolution processes: These may include arrangements for handling distress and bank failure; all of which must be done in the best interest of bank depositors and indeed, the economy 2.5. Major legislations regulating banking 2.5.1 Banks and Other Financial Institutions Act (BOFIA) The primary legislation for the regulation of banks in Nigeria is the Banks and Other Financial Institutions Act (BOFIA) which, with the Central Bank of Nigeria (Establishment) Act 2007 (CBN Act), gives the Central Bank of Nigeria (CBN) powers to supervise and regulate banks and other financial institutions in Nigeria. 12 BOFIA is a comprehensive piece of legislation that covers all aspects of banking regulation and supervision, including: ✓ Licensing of banks and other financial institutions ✓ Capital requirements ✓ Liquidity requirements ✓ Risk management ✓ Corporate governance ✓ Consumer protection ✓ Anti-money laundering and counter-terrorism financing 2.5.2. Highlights of BOFIA 2020 Some excerpts of BOFIA are highlighted below: Section 1: Functions, powers and duties of the Central Bank of Nigeria The Central Bank of Nigeria has all the functions and powers conferred and the duties imposed on it by this Act. Section 2: Banking Business Only a company duly incorporated in Nigeria and holds a valid banking license issued by the CBN can engage in banking business. Any violation will lead to imprisonment for a term of not less than five years and a fine of not less than N5,000,000; amongst other things. Section 6. Opening and closing of branches No bank may open or close any branch office, cash centre or representative office anywhere within or outside Nigeria except with the prior consent of the Bank. Section 7: Restructuring, re-organisation, mergers and disposal etc. of banks Only with CBN approval can control or ownership structure of a bank change. Section 9: Minimum paid-up share capital The CBN has powers to determine the capital requirement of each category of banks and failure to comply is a ground for the revocation of any license issued under this Act. Section 12: Revocation banking of license The Governor may, with the approval of the Board, revoke any license granted under this Act if a bank— (a) ceases to carry on in Nigeria the type of banking business for which the license was issued for any continuous period of six months or any period aggregating six months during a continuous period of 12 months; (b) goes into liquidation or is wound up or otherwise dissolved; (c) fails to fulfil or comply with any condition subject to which the license was granted. (d) has insufficient assets to meet its liabilities; 13 (e) conducts its business in an unsound manner or its directors engage in unsafe practices; (f) is involved in a situation, circumstance, action or inaction which constitutes a threat to financial stability; (g) fails to comply with any obligation imposed upon it by this Act or the Central Bank of Nigeria Act, or any other rule, regulation, guideline or directive made hereunder; (h) is, in the opinion of the Bank critically undercapitalised with a capital adequacy ratio below the prudential minimum or such other ratio as the Bank may prescribe; (i) fails to commence banking operation within 12 months following the grant of a licence: or (j) Fails to comply with the provisions of section 9 or 13 of this Act. Section 13: Minimum capital adequacy ratio (CAR) All banks are required to maintain, at all times, capital funds unimpaired by losses. The Bank may prescribe a higher or lower capital adequacy ratio with respect to any category of banks. There are penalties for failure to observe such specified ratios, which may include revocation of license. Section 14: Minimum holding of cash reserves Banks are expected to maintain with the CBN; cash reserves, and special deposits or any non-interest banking instruments as may be approved by the Bank and hold specified liquid assets or other securities, as the case may be. Sections 15 & 16: Maintenance of reserve fund Banks to maintain reserve funds and may only declare dividend from their net profit after provision for tax, expenses and losses including contingent losses. Sections 17: Disclosure of Interest Directors, Managers or officers of a bank must disclose any interest they have in a credit facility and any lending must be in accordance with the Rules and Regulations of the bank; and where adequate security is required by such rules and regulations, it must be taken. Section 18: Prohibition of interlocking directorship, etc. A bank cannot re-employ any person who has been convicted by a court for any offence involving fraud or dishonesty or professional misconduct. Except with the approval of the CBN, no bank shall have, as a director, any person who is a director of any other bank; or entity which has significant influence on the bank. Section 19: Restriction on certain banking activities A bank shall not, without the prior approval in writing of the Bank, grant - (1)(a) to any person, loan or credit facility more than 20% of the shareholders fund unimpaired by losses in the case of a commercial bank, and 50% in the case of a merchant bank. (This provision is commonly referred to as the Single Obligor Limit) (3)(a) permit to be outstanding, unsecured advances, loans or unsecured credit facilities of an aggregate amount in excess of N1,000,000.00 or such amount as may be prescribed by the Bank to its directors or significant shareholders… 14 (b) permit to be outstanding to its officers and employees, unsecured advances, loans or unsecured credit facilities which is in excess of one year's emolument to such officer or employee, or such amount as may be specified by the Bank ; and (c) remit, either in whole or in part, the debts owed to it by any of its directors, or past directors or significant shareholders. (6) In this section — "director" includes director's wife, husband, father, mother, brother, sister, son, daughter, their spouses, a company in which the director is also a director or shareholder or holds at least 5% shareholding of the company, a company whose board, or managing director, is accustomed to act in accordance with the advice, directions or instructions of the director and all other related parties as may be determined by the Bank Section 33: Special Examination (1) The Governor shall have power to order a special examination or investigation of the books and affairs of a bank, other financial institution or specialised bank where— a) it is in the public interest to do so (b) the bank, other financial institution or specialised bank has been carrying on its business in a manner detrimental to the interest of its depositors or creditors: (c) the bank, other financial institution or specialised bank has insufficient assets to cover its liabilities to the public: (d) the bank has been contravening the provisions of this Act or any other relevant law; or (e) an application is made by— a director or shareholder of the bank or a depositor or creditor of the bank. Section 34: Intervention powers in failing bank 1) Where a bank informs the Bank that- (a) it is likely to become unable to meet its obligations under this Act; (b) It is about to suspend payment to any extent; (c) it is insolvent; or (a) where, after an examination under section 33 of this Act, the Bank is satisfied that the bank is in a grave situation as regards the matter referred to in section 33 (1) of this Act, the Governor may by order in writing, exercise any one or more of the powers specified in subsection (2). Section 36: Resolving systemic banking crisis The CBN may render such assistance as may be required to resolve a systemic banking crisis occasioned whenever two or more of the following conditions occur— (a) banks that are critically distressed control 12.5% or more of the total assets in the industry; (b) 12.5% or more of total industry deposits are threatened; (c) 12.5% or more of the banking system's total loans are nonperforming; (d) 25% or more of banks have applied for liquidity support in excess of 50% of the aggregate takings from the Bank's window or total interbank funds in the market or have been suspended by their settlement banks for failure to meet clearing obligations. 15 Section 41: Asset separation tool The CBN may, in the course of seeking to resolve the liquidity crisis of a failing bank, transfer assets of that bank, to one or more private asset management vehicles (e.g. AMCON). Section 44: General restriction on advertisement No person, other than a bank or any other person authorised to take deposits, shall issue any advert inviting the public to deposit money with it. Section 46: Prohibition of the receipt of commissions etc. by staff of banks. Directors and employees of banks are prohibited from receiving commissions, gift, employment, service, gratuity, money, property or thing of value for themselves or their relations from any person for rendering any banking service. Section 47: Disqualification and exclusion of certain individuals from management of banks (I) Every bank shall, before appointing any director, chief executive or management staff of such grade as may be specified from time to time by the Bank, seek and obtain the Bank's written approval for the proposed appointment (2) No bank shall employ or continue the employment of any person as a director, manager, secretary or an officer who— (a) is of unsound mind or, as a result of ill health, is incapable of discharging his duties; (b) is dismissed from the service of the Federal, State or Local Government or any of the agencies of such government; or (c) is declared bankrupt or suspends payments or compounds with his creditors, including his bankers (d) is convicted of any offence involving dishonesty or fraud; (e) is guilty of serious misconduct in relation to his duties; or (f) in the case of a person who possesses a professional qualification, is disqualified or suspended otherwise than of his own request from practising his profession by the order of any competent authority made in respect of him personally. (4) Any person whose appointment with a bank has been terminated or who has been dismissed for reasons of fraud, dishonesty or convicted for an offence involving dishonesty or fraud shall not be employed by any bank in Nigeria Section 49: Offences by directors and managers of banks Any person being a director, manager or officer of a bank who fails to take all reasonable steps to secure— (a) compliance by the bank with the requirements of this Act, or (b) the correctness of any statement submitted under the provisions of this Act, commits an offence and is liable on conviction to—a fine of not less than 16  N2,000,000 or imprisonment for a term of not less than three years or to both such fine and imprisonment. Section 50: Penalties for offences not otherwise provided for Any bank or any person who contravenes any of the provisions of this Act or regulations made for which an offence or penalty is not expressly provided, commits an offence and is liable to a fine of not less than N2,000,000. Section 51: Protection against adverse claims The Federal Government, the Bank or any officer of the Federal Government or the Bank, cannot be subject to any action, claim or demand by, liability to, any person in respect of anything done or omitted to be done under this act; so long as they acted in good faith. Section 52: Jurisdiction of the Federal High Court The Federal High Court has exclusive jurisdiction to try any offence under this Act and to impose the penalties prescribed. Section 53: Supremacy of BOFIA The provisions of this Act shall apply notwithstanding the provisions of other applicable laws, in so far as they relate to banks. Where any of the provisions or any other law or enactment is inconsistent with any of the provisions of this Act, the provisions of this Act shall prevail. Section 55: Priority of deposit liabilities Where a bank goes into liquidation the assets of the bank shall be available to meet all the deposit liabilities of the bank and such deposit liabilities shall have priority over all other liabilities of the bank. Section 56: Power to make regulations The Governor may make rules and regulations, for the operation and control of all institutions under the supervision of the Bank. Section 64: Consolidated Supervision The Bank may, cause an examination, to be carried out by an examiner appointed by it, of the books, accounts and records of any bank and entities associated with or otherwise affiliated to the bank, as the case may be. Section 67: Corporate Governance and Ethics The Governor shall make regulations and issue guidelines for or with respect to— Corporate governance, including the appointment of principal officers of banks; Prohibition or restriction on mutual holding of shares or other interests between banks, and Risk management of banks. Section 70: Designation of Systemically important banks 17 The Governor may, designate any bank as a systemically important bank or such other designation as the Governor may specify. Section 71: Restrictions on operations of Agents of banks The CBN may regulate the operations of agents of banks. Section 72: UNCLAIMED FUNDS OR ABANDONED PROPERTY Where a current or savings account has not been operated for a period of one year or such other period as the Bank may specify, no withdrawal shall be made on the account except with the approval of two authorised signatories of the bank. It also provides for advertisement of such dormant accounts in the media. Section 74: Establishment of Banking Sector Resolution Fund This Act establishes the Banking Sector Resolution Fund which shall be domiciled with the CBN. The CBN will contribute 10 billion Naira (section 75) The NDIC will contribute 4 billion Naira (section 76) Each bank will contribute an amount equal to 10 basis points of their total assets. (section 77) These contributions are to be made at the commencement of the Fund and subsequently to be made annually. Section 78: Purpose of Resolution Fund The Resolution Fund shall be utilised exclusively— (a) to pay the operating costs of a bridge bank; (b) to pay the costs of transferring the whole or any part of the business at the bank, specialised bank or other financial institution pursuant to a resolution measure; (c) to provide a loan, advance, overdraft or other credit facility to a bank. specialised bank or other financial institution, financial institution under resolution or a bridge bank; (e) for such other purposes in support of resolution measure as may be prescribed by the Governor Section 94: empowers CBN power to manage and regulate operations of the Fund Section 97: Power to freeze accounts This section permits the CBN to freeze a customer’s account, where the Governor has reason to believe that transactions undertaken in that account with any bank, specialised bank or other financial institution are such as may involve the commission of any criminal offence under any law. Section 99: Power to impose and review penalties The Governor may reduce or increase the monetary penalty payable for the contravention of any of the provisions of this Act. Section 100: Power to grant exemptions The Governor may exempt any other financial institution, non-interest bank or specialised bank from any of the provisions of this Act by a notice published in the print and electronic media and in the Gazette. 18 Section 101: Power to charge fees The Bank may charge such fees as the Board may consider appropriate for any of its services. Section 102: Special Tribunal for the Enforcement and Recovery of Eligible Loans There is established the Special Tribunal for the Enforcement and Recovery of Eligible Loans. The Tribunal shall exercise the jurisdiction, powers and authority as conferred on it in the Act. Membership and composition of the Tribunal is highlighted in section 103. BOFIA empowers the CBN to implement all the functions conferred on it by that law. Other legislations that impact banking in Nigeria include: 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) SELECT CBN INITIATIVES In recent years, the CBN has introduced a number of new regulations to promote financial stability and consumer protection. For example, in April 2023, the CBN introduced a new regulation that requires banks to have a minimum capital adequacy ratio of 12.8%. The CBN has also introduced several new regulations for a variety of purposes. PRUDENTIAL GUIDELINES The Prudential Guidelines for Deposit Money Banks (DMB) were introduced in 1990. They were meant to guide asset classification and loan loss provisioning. Prior to that, provisioning for non-performing loans followed the rule of the thumb with each bank free to determine when to make provision. There was no standard practice. With the financial crisis of 2007/09, which adversely affected the Nigerian Banking System, the PG was due for a review. Consequently, as part of the initiative to enhance the quality of the banks, the CBN undertook a review of the prudential guidelines in 2010. The revised guidelines aim to address various aspects of banks’ operations, such as: risk management, corporate governance, KYC and anti-money laundering/ counter financing of terrorism and loan loss provisioning. The guidelines also address the peculiarities of different loan types and financing to different sectors HIGHLIGHTS OF THE PRUDENTIAL GUIDELINES, 2010 RISK MANAGMENT 3.1 Credit policy to be duly approved by board of directors: Banks should prepare a comprehensive credit policy duly approved by their Board of Directors. The policy should, inter alia cover loan administration, disbursement and appropriate monitoring mechanism etc. The policy should be reviewed at least every three years. 19 3.2 Limit on exposure to a single obligor/ connected lending: – (a) The total outstanding exposure by a bank to any single person or a group of related borrowers shall not at any point in time exceeds 20% of the bank’s shareholders fund unimpaired by losses. –. (c) The total outstanding exposure (on and off-balance sheet) by a bank to all tiers of government and their agencies shall not at any point in time exceed 10% of the total credit portfolio. – (d) A large exposure is any credit to a customer or a group of related borrowers that is at least 10% of a bank’s shareholders fund unimpaired by losses. 3.3 Credit Concentration Policies: Banks should put in place effective internal policies, systems and controls to identify, measure, monitor, and control their credit risk concentrations. The policies should be approved by the Board of Directors and should cover the different forms of credit risk concentrations to which a bank may be exposed 3.4 Exposures to Directors and their related interests: (a) A significant shareholding is defined as a holding of at least 5% (individually or in aggregate) of a bank’s equity. (b) Director, insider and significant shareholder credit exposure should be fully disclosed by banks in their financial statements and returns prescribed by the Central Bank of Nigeria. (c) Insiders include directors, significant shareholders and employees. According to BOFIA, the term “director” includes director’s wife, husband, father, mother, brother, sister, son, daughter and their spouses. (d) Banks should ensure that their credit policies specifically address lending to directors as part of related parties or insiders lending policies. 3.7 Basic Information on Borrowers: (a) Banks shall not approve and/or provide any exposure (including renewal, enhancement and rescheduling/restructuring) until and unless the Loan Application Form (LAF) designed by banks is completed. (b) The Loan Application Form shall contain such information as the bank may require to evaluate the application, which may include recent audited financial statements/management accounts, projected cash flows, records of pas bank accounts. (c) All banks must show evidence of making enquiries or obtain credit report from at least two (2) credit bureaus before granting any facility to their customers. The result of the enquiry should be documented in the credit file of the customer. (d) All banks should also provide evidence that a search has been conducted on the borrower in the CBN’s Credit Risk Management System (CRMS) database. 20 LOAN LOSS PROVISIONING 12.1 Credit portfolio classification system for facilities other than “Specialized loans” (a) Licensed banks should review their credit portfolio continuously (at least once in a quarter) with a view to recognising any deterioration in credit quality. (b) Credit facilities should be classified as either “performing” or “non- performing” as defined below: (1) a credit facility is deemed to be performing if payments of both principal and interest are up-to-date in accordance with the agreed terms; (2) a credit facility should be deemed as non-performing when any of the following conditions exists: (i) interest or principal is due and unpaid for 90 days or more; (ii) interest payments equal to 90 days interest or more have been capitalised rescheduled or rolled over into a new loan (except where facilities have been reclassified as specified in 12.1(d) below). (e) Non-performing credit facilities should be classified into three categories namely, sub-standard, doubtful or lost on the basis of criteria below: (1) Sub-Standard The following objective and subjective criteria should be used to identify sub-standard credit facilities: (i) Objective Criteria: facilities on which unpaid principal and/or interest remain outstanding for more than 90 days but less than 180 days. (ii) Subjective Criteria: credit facilities which display well defined weaknesses which could affect the ability of borrowers to repay such as inadequate cash flow to service debt, undercapitalisation or insufficient working capital, absence of adequate financial information or collateral documentation, irregular payment of principal and/or interest, and inactive accounts where withdrawals exceed repayments or where repayments can hardly cover interest charges. Provision 10% (2) Doubtful The following objective and subjective criteria should be used to identify doubtful credit facilities: (i) Objective Criteria: facilities on which unpaid principal and/or interest remain outstanding for at least 180 days but less than 360 days and are not secured by legal title to leased assets or perfected realisable collateral in the process of collection or realisation. (ii) Subjective Criteria: facilities which, in addition to the weaknesses associated with sub-standard credit facilities reflect that full repayment of the debt is not certain or that realisable collateral values will be insufficient to cover bank’s exposure. Provision 50% 21 (3) Lost Credit Facilities The following objective and subjective criteria should be used to identify lost credit facilities: (i) Objective Criteria: facilities on which unpaid principal and/or interest remain outstanding for 360 days or more and are not secured by legal title to leased assets or perfected realizable collateral in the course of collection or realization. (ii) Subjective Criteria: facilities which in addition to the weaknesses associated with doubtful credit facilities, are considered uncollectible and are of such little value that continuation as a bankable asset is unrealistic such as facilities that have been abandoned, facilities secured with unmarketable and unrealizable securities and facilities extended to judgment debtors with no means or fore closable collateral to settle debts. Provision 100%. 12.13 Collateral Adjustment and Provisioning for Lost Facilities (Haircut Adjustments): (a) In order to encourage banks to utilize more credit enhancement and mitigation strategies, a process for collateral adjustments in loan provisioning is being introduced. This process will put into consideration the quality and realisability of underlying collaterals pledged against loan facilities. (b) For collaterals to be considered for “Haircut Adjustments”, it must be: (i) Perfected; (ii) Realizable, with no restrictions on sale; and (iii) Regularly valued with transparent method of valuation. Revaluation of fixed assets: Prior approval of the CBN must be obtained by any bank before the recognition of the revaluation surplus on fixed assets in its books, taking into consideration that: (i) The basis of the underlying fixed assets valuations must be stated, and the valuation made by qualified professionals whose identity and qualifications are stated; (ii) The difference between the market and historic values of the eligible fixed assets being revalued shall be discounted by 55%; (iii) The revaluation of fixed assets is applicable to own premises only; and (iv) The revaluation of fixed assets (owned premises only) is permissible within a minimum period of seven years after the date of the purchase of the asset or the last revaluation. Capital adequacy ratio (a) The minimum ratio of capital to total risk-weighted assets shall remain at 10% as prescribed by the CBN. However, banks are encouraged to maintain a higher level of capital commensurate with their risk profile. (f) Based on a level of capital adequacy ratio below the acceptable limit, a bank may be classified as follows: Adequately capitalized Under capitalized 22  Significantly under capitalized Critically under capitalized Insolvent The conditions and corresponding supervisory actions for banks with the classifications under (f) above are stipulated below: i. Under capitalised banks (i.e. banks with CAR, greater than or equal to 5% but less than the prescribed minimum level of 10%) i) Conduct special examination; ii) Restrict dividend distribution; iii) Restrict investment in other subsidiaries/related companies; iv) Restrict investment in fixed assets ii. Significantly undercapitalised banks (i.e. Banks with CAR less than 5% but equal to or greater than 2%) i) Restrict new lending to recoveries (zero based lending) ii) Request for business plan on how fresh funds are to be injected into the bank; iii) CBN to review business plan within two weeks and communicate to the bank its acceptability or otherwise; iv) The CBN should make the final capital call on the bank within 4 months from time of acceptance of the business plan; v) Within two months after the final capital call, the CBN may take over management and control of the bank and hand it over to NDIC; vi) The CBN may appoint the NDIC, “Liquidator”, which may consider the following options; (a) Recapitalisation and restructuring by new investors; (b) Create incentives for healthy banks to take over the sick one; (c) Encourage private debt factoring companies to acquire the bad debts of the bank; and (d) Recommend the revocation of licence. iii. Critically undercapitalized (i.e. banks with CAR less than 2%) Take over management and control and/or revoke licence iv. Insolvent banks (i.e. banks that have negative CAR) Licence revocation Other select CBN initiatives with respect to banking regulation a. Rendition of False Returns to the Regulatory Authorities. (Circular Ref. BSD/1/2003) This ensures data integrity for proper administration and planning and punishes erring banks. b. Foreign exchange management circulars which forbid unlawful use of foreign exchange including “free fund” transactions, round tripping, nondisclosure of foreign 23 accounts, non-rendition of statutory returns, and other foreign exchange malpractices. Essence of these is to ensure the realization of the objectives of monetary policy, check capital flight and curb money laundering. c. Prohibition of borrowing from within the banking system to re-capitalize banks (BSD/DIR/GEN/LAB/08/008 of Feb.5, 2015). Where such funds are borrowed outside the banking system, they must be of the type and nature that qualify as part of capital in accordance with CBN’s Guidance Notes on the Calculation of Regulatory Capital. d. Currency substitution and Dollarisation of the Nigerian Economy (BSD/DIR/GEN/LAB/08/013 of April 17, 2015) Precludes pricing of goods and services from charging in foreign currency for services in Nigeria. e. Reporting Unethical Conduct/Whistle blowing (BSD/DIR/GEN/LAB/08/017 of April 2, 2015) directs that, reports on dishonesty and lack of integrity of CBN employees while working in any bank be sent with detailed information Directly, Confidentially or anonymously by post to: Head, Ethics & Anti-Corruption Office, Governors’ Department Central Bank of Nigeria No. 31 Tafawa Balewa Street Central Business District Abuja, FCT f. Prudential Regulation for the Management of Foreign Exchange Risks of Banks. (BSD/DIR/GEN/LAB/07/037 of Oct. 24, 2014). The aggregate foreign currency borrowing of a bank excluding intergroup and inter- bank (within a group or from other Nigerian banks) should not exceed 75% of its shareholders’ funds unimpaired by losses. Aimed at curbing exchange/sovereign risks. g. Measures to dissuade issuance of dud cheques in Nigeria This compliments the Dishonoured cheques Act 2004. It outlines actions to be adopted by banks in combating the crime and provides punishment for issuers and defaulting banks, viz. ✓ Recall/cancel all unused cheque books issued to serial issuers of dud cheques ✓ Bar the affected customers from use of the clearing system for a period of five (5) years. ✓ Forward the names of Dud Cheque offenders to the three Private Credit Bureaux and the Credit Risk Management System (CRMS). ✓ The customers’ names would be listed on the database of the private credit bureaux and CRMS for a period of five (5) years from the date of submission, after which offenders will be eligible for removal. ✓ Bar the serial issuers of dud cheques from accessing credit facilities from the banking system for a period of five (5) years. ✓ Where an Institution fails to report a serial dud cheque issuer in its return to the CBN CRMS and Private Credit Bureaux as required, it shall be considered as 24  concealment and misrepresentation of material fact and punished under BOFIA. h. Know Your Customer (KYC): The CBN KYC regulations require banks to identify and verify the identity of their customers, and to monitor their transactions for suspicious activity. This helps to prevent money laundering and other financial crimes. i. Bank Verification Number (BVN): The BVN is a unique identifier that is assigned to each bank customer in Nigeria. It is used to verify the identity of customers and to prevent fraud. j. Consumer protection: The CBN has a number of initiatives in place to protect consumers of banking services. These include regulations on fees and charges, on overdrafts, and on debt collection. k. Financial inclusion: The CBN is committed to promoting financial inclusion, which means ensuring that everyone has access to financial services. To this end, the CBN has introduced a number of initiatives, such as the mobile money scheme and the agent banking scheme. l. Basel Accords: The Basel Accords are a set of international standards for banking regulation, developed by the Basel Committee on Banking Supervision. The CBN has adopted the Basel Accords, which require banks to maintain certain levels of capital and liquidity to reduce systemic risk. MODULE 3: Banking Regulation and Supervision Outline ▪ Supervision ▪ Why Supervise Banks? ▪ Impact of Supervision on Financial System ▪ What is Bank Examination? ▪ Macro-Prudential approach to supervision 3.1 Supervision All banks are subject to periodic detailed examination by CBN and NDIC to determine inter alia the solvency status of the banks and to ascertain that they are not in an imminent danger of collapse and that they are operating within the laws, rules and regulations. Supervision is either On-site or Off-site. On-Site Examination is carried out on the premises of the bank being reviewed. It consists of physically authenticating periodic reports of banks sent to the Regulators especially when off-site surveillance will be inadequate to do so. 25 Off-Site Supervision is done on the premises of Regulator and comprises receipt and analysis of mandatory statutory Returns periodically sent to the CBN as required by law. Regulatory authorities, in emerging markets, which do not have adequate resources rely more on off-site supervision. 3.2 Why Supervise Banks?  Banks role as financial intermediaries is risky.  Banks are guardians of people’s wealth and they have to be checked for the benefit of their depositors and other stakeholders  Bank examination therefore looks at: ▪ How much risk is undertaken by the bank ▪ How well are the risks being managed, and ▪ What resources are available to the bank to support its business and risk profile 3.2.1 Bank Supervision Banking Supervision can be described as the process of monitoring the performance of banks to ensure that their operations are carried out in a safe and sound manner and in compliance with laid down rules, laws and regulations Banking crisis is best mitigated through effective supervision and surveillance. It includes the determination of the financial condition of banks, detection of ill- health through Early Warning Signals (EWS) and taking appropriate Prompt Corrective Action (PCA) to restore a troubled bank to good standing. 3.3 Impact of Supervision on the Financial System Bank supervision plays a critical role in ensuring the safety and soundness of banks and stability of the financial system The impact of bank supervision: ▪ Financial stability ▪ Safety and soundness ▪ Market transparency, discipline and confidence ▪ Deposit insurance and protection ▪ Compliance with regulations and laws 26  ▪ Operational resilience ▪ Prevention of unfair and unethical practices ▪ Adherence to capital adequacy standards ▪ Prudent Corporate Governance 3.4. What is Bank Examination? Bank examination is a supervisory tool used by Regulatory Authorities on a regular and continuous basis to ascertain the safety and soundness of banks’ operations by determining: ▪ the effectiveness of their governance structures ▪ compliance with banking rules and regulations, ▪ their financial conditions Routine on-site examination of banks is presently conducted twice a year as follows: 1) Risk Assets assessment 2) Risk Based Supervision In line with international best practice, Nigeria has opted for a Risk-based Supervision (RBS) approach Nigeria is largely compliant with the 29 Core Principles for Effective Banking Supervision set by the Basel Committee of Banking Supervisors (BCBS). 3.4.1 What is Risk Based Supervision? RBS is a process which involves: ▪ Identification of significant activities of a bank ▪ Determining the risks inherent in each of such activities ▪ Evaluating the risk management framework put in place by the bank to manage the risks ▪ Determining the overall riskiness of the banks business with a view to foreclosing a manifestation of the risks 3.5 Macroprudential Approach to Supervision ▪ This is an approach that complements traditional supervision and regulation of individual banks (Micro mode) with explicit consideration of threats to the stability of the financial system as a whole ▪ The ultimate goal of macro-prudential supervision is to minimise the systemic risk which could inflict significant damage on the broader economy ▪ Macro prudential supervision can only support micro prudential supervision. It cannot supplant it 27  ▪ Regulators (CBN & NDIC) in Nigeria carry out the following examinations……… 3.5.1 Types of Bank Examination a. Routine Risk Assessment Examination  This examination is conducted as at the financial year end of every bank, which is currently 31st December.  It is an Asset Quality examination that reviews all the assets on the balance sheet of the bank to check for impairments.  Determines compliance with prudential guidelines  Determines provisioning requirements for non-performing loans and other known losses which are factored into the earnings of the bank to ascertain actual profit or loss for the financial year. b. Special Examination A special examination is conducted when the regulatory authorities have cause to believe that the safety and soundness of a bank’s operations have been considerably impaired.  It is a statutory examination  This is a prelude to regulatory intervention c. Foreign Exchange Examination  This is conducted regularly to check compliance with forex rules and regulations  It also reviews sources and application of funds d. Special Investigations  These are unscheduled bank examination activities arising from petitions from the banking public, suspicions, or other prior examination activities.  They are carried out to ascertain the true position of the issues under investigation. 3.5.2 Report of Findings At the end of every examination, there is a report of findings with recommendations 28 Reports must be factual and assertions must be supported with credible documentary evidence. Examination findings must be discussed with the management of the bank and Management explanations must be factored into the final report. It is an open reporting system and therefore there are no surprises MODULE 4: “CAMELS” PARAMETERS In evaluating the well-being of banks, the CBN employs what is known as the “CAMELS” parameters; an acronym for the components described below: Capital Adequacy What constitutes core bank capital? Liability of the bank to the owners Equity contributions by owners Reserves generated mainly from profits Retained Earnings – unappropriated profits What are the functions of Bank Capital? Provides the infrastructure and fixed assets for bank operations Provides support for the volume and character of the bank’s business Cushions the bank against operating losses... It provides a buffer between operating losses of a bank and depositors’ funds Asset Quality It is the productive capacity of the assets of a bank. Productivity includes: a. Income generation capacity (unimpaired) b. Liquidity (convertibility of the assets to cash with little or no loss in value) Assets are arranged on the Balance sheet in their order of liquidity from cash and short-term funds to investments in govt securities, loans and advances to fixed assets and other assets Assets are generated from Liabilities that comprise deposits from customers, takings from banks, borrowings and capital. Liabilities are real and cannot be wished away. Assets may be unreal, stolen, unrealisable – They may be paper assets: with little or no value. At some point total amount realisable from the assets may not be enough to cover the liabilities of the bank... A situation of insolvency. Assets generate the most income for banks. They also generate the largest losses for banks..... Depending on their PRODUCTIVITY – ability to generate income or cause losses. 29 Management Management generates liabilities and creates or invests in assets to generate income for the banks. Without Management nothing can happen. It is management that drives Financial Intermediation and Assets and Liability Management (ALM). Management is judged by the results of all the other parameters - CAEL. Is S included? Earnings Assets generate incomes for banks. Liabilities generate costs, which must be managed to low cost. Productivity of assets determines the volume and quality of income maximisation Good earnings generate profits which lead to retained earnings, capital reserves and payment of dividends. The higher the income, the higher the value of reserves and dividends, the higher the ability to generate capital from within the bank. Liquidity Ability of the bank to meet maturing obligation without forced sale of asset at a loss and without distressed borrowing (paying excessive interests for deposits to fund its operations. It is also the ability of the bank to fund the creation of new assets or take advantage of new investment opportunities from its ongoing business activities. Sensitivity to market risk Market Risks include: a. Interest rate b. Exchange rate c. Stock market or commodity prices i. How rate sensitive are the bank’s assets? ii. How rate sensitive are its liabilities? iii. What impact on banks’ income? GENERAL ROLE OF BANK SUPERVISORS The three clearly discernible roles with the objective of ensuring that banks operate safely and effectively are: Preventive Curative Liquidation Overall objective is to guarantee that banks operate safely and efficiently. 30 An imperative component of bank supervisors” functions is to ensure the implementation of the Core Principles which have come to represent the best standards in supervision worldwide. 1. PREVENTIVE ROLE a. Entry Point: Ensure that individuals with questionable integrity are precluded from engaging in the banking sector either as shareholders or as managers or both. Rigorous “fit and proper person” test is therefore conducted to prevent undesirable and unscrupulous persons from owning and managing banks. This approach recognizes the difficulties of spotting and ejecting such persons after they have secured a place in the sector. The failure of banks in the recent past is indicative of the failure of this strategy. b. Prescription of Capital An important measure to enhance banks’ viability is the high capital adequacy requirement for banks. (Capital adequacy is the amount of capital relative to a financial institution's Risk weighted assets. (The higher the ratio, the stronger the bank). The perception is that when prescribed capital is high a bank is less likely to fail. The aim of risk-based capital is to encourage banks to keep a sufficient cushion of equity capital and reserves to support the volume and character of its operations; c. Continuous Supervision: On-Site and Off-Site supervision diligently and timeously executed. d. Information Disclosure: Bank Supervisors compel banks to disclose stipulated information. Disclosure to the general public through the announcement of operating results. Objective of this is to ensure that governments, supervisors, depositors, investors and the general public are adequately informed of banks’ performance/condition. Enforcement of adequate disclosure including the level and timing is a paramount role for Bank Supervisors. e. Imposition of Sanctions: Regulators are empowered in the enabling statutes to impose a wide range of sanctions including- Payment of monetary penalty; Removal of directors/officials from office; Prosecution of directors/officials; Suspension of banks from forex transactions or Clearing House; Takeover of management, and Revocation of banking licence. The offences for which any of these sanctions can be imposed in various countries are spelt out in different laws, directives and circulars. 31 2. CURATIVE ROLE This aims at taking concrete steps to correct anomalies in the system thus preventing loss of confidence or run on banks. For example, when certain banks started having liquidity issues in the recent past, the CBN intervened by injecting funds into those banks and taking over the management. The Asset Management Corporation of Nigeria (AMCON) was also set up to purchase the toxic risk assets of the ailing banks so as to inject funds which improved their liquidity. 3. LIQUIDATION ROLE The objective here is to ensure a smooth and orderly winding up of the banks and getting the best possible revenue from sale of their assets so that depositors do not face any avoidable loss. Conclusion: Banking Regulation and Supervision are undertaken to ensure and enforce the existence of good corporate governance and safe and sound banking process. Effective collaboration by Regulatory Authorities is required in this respect. Non-compliance with laws, rules and regulations particularly heightens exposure to credit, liquidity, operational, reputational, market and legal risks. We should be mindful of various penalties including fines, suspension from clearing house operations, suspension from foreign exchange transactions, removal and blacklisting of officer or director, take-over of management, revocation of banking license and liquidation as probable consequences of non-compliance. Banks and bankers are required to apply due care and skill, imbibe the tenets of sound corporate governance, principal among which is compliance with applicable banking laws, rules and regulations. 32