Last week I reminded readers about two articles featured on this column in July/August 2007. The basic argument in those two articles was similar-strategy, unlike regulation is about uniqueness. Regulation on the other hand is about common standards and fair and equal treatment. Since the successful banking industry consolidation of 2004-2005, the banking industry by-and-large abdicated strategic thinking to the regulator, the CBN and the result was largely homogenous behaviour by industry participants, who were now left competing on size, network, branding and execution. The current economic circumstances remind everyone that businesses can only be managed on the basis of distinct strategic intent, competitive profile and values.
This week I want to be more forward looking. What options should the industry and policy makers be examining in the present scenario? First of all we note that the CBN governor has stated a figure-N800billion as representing impaired capital market margin loans. We would for the sake of prudence take that figure as a minimum rather than an actual estimate. We also know however that margin loans do not represent the entirety of impaired assets in the banking sector, especially in the context of an economic slowdown when the propensity for asset quality deterioration in banking is higher. Reports suggest for instance that downstream oil sector lending may also be problematic. I would also examine real estate development loans and unsecured import finance facilities for instance as other categories worth examining.
It is the above considerations that make me support the concept of an “Asset Management Company” or “bad bank” a proposal that was initially part of Soludo’s consolidation agenda but that has now been revived in the wake of margin loan losses. Just like in other financial markets, if a way is not found to free up the banks’ balance sheets, liquidity to the rest of the market will be impaired as inter-bank lending freezes, interest rates continue to rise, and the liquidity crunch will move from the capital to the money market. I however believe deciding on an asset management company is the easy part. The more complex and critical issue is fashioning out the operating modalities and securing legislative backing for the proposal. How will the assets to be taken over be valued? Will they be acquired at the value of the underlying loan or the significantly diminished value of the collateral? What conditions, including sanctions and penalties will attach to availing oneself of the AMC’s “bail out”? How will the regulators ensure transparency and the protection of public interest in this whole process? These are important questions that will either frustrate or discredit the idea.
There is also talk of a UK style “Financial Services Authority” carved out of the CBN and other financial sector regulators to form an industry-wide financial services regulator with remit over the whole rather than sectoral silos as is the present practice. I also support this proposal which I think is actually over due. Indeed in my article of July 25 2007 on FSS 2020, I made the same point, “There are other issues that will have to be addressed as CBN and the banks implement FSS 2020-what will be the future role of the CBN itself-a financial services regulator (like the UK Financial Services Authority-FSA) or an economy manager concerned with price stability (like the Bank of England or US Federal Reserve) or both as it currently is?-the broader question is of course about the structure of legal and regulatory systems”.
I believe a new integrated financial services regulator should be created out of a merger of three CBN departments, banking supervision, bank examination and other financial institutions department (OFID) with the insurance regulator and SEC. I personally will prefer that the pensions regulator be kept out of this structure for now-the pension sector is incipient and immature and there may also be some value in isolating pension assets to build contributor confidence and insulate pension assets (to the extent possible) from the rest of financial assets. But even then I would like new statutory mechanisms to increase coordination between the new “FSA” and the pensions regulator, perhaps including appointing PENCOM Commissioners and its head from that body and creating mandatory consultative structures.
There is also the question of headship of the CBN. What is the profile of persons to be appointed to the CBN Governorship? People will off course point out that the global trend is to appoint academic economists to head central banks. I would however argue that given our circumstances and the pool of available talent, the net should be cast wider to include persons with depth of knowledge and experience of finance and financial markets, banking, business and the economy whether or not such persons obtained a degree in economics. In the US, the profile of the Federal Reserve chair is not just an economics degree or doctorate. He is comfortable in boardrooms, has held senior positions probably in regional reserve systems and is reasonably comfortable (and thus relatively immune from temptations!). There are not many academics in Nigeria who fit that profile.
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