Central Bank $ NDIC Plan Comprehensive Banking Supervision
THE Central Bank (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) plan to introduce a comprehensive Banking Supervision framework and has sent a draft to banks requesting their inputs.The scheme to be known as Consolidated Supervision is a comprehensive approach to banking supervision which seeks to evaluate the strength of an entire group to which a bank belongs, taking into account all the risks which may affect the bank, regardless of whether such risks are carried in the books of the bank or to related entities.
The basic objective of the planned consolidated supervision is the promotion of the overall evaluation of the strength of a group to which a bank belongs, in order to assess the potential impact of other companies in the group on the operations of the bank. The practice allows financial sector supervisors to understand the relationship among the legal entities and to assess and monitor how effectively the group identifies, measures, monitors and controls risks, and to recognise incipient problems.
The CBN's circular is to prepare the regulatory authorities to undertake a much more complex responsibility of regulating banks with subsidiaries and branches outside the nation as well as those that are engaged in non-banking businesses such as insurance, pension and securities.
The CBN circular reads in part: "In keeping with global trend and current best practice in supervision, the CBN in conjunction with the NDIC have developed the attached draft framework for the consolidated supervision of banks in Nigeria as a complement to the risk-based supervisory framework earlier released to the Nigerian banking industry in 2005."
It stated that the objectives are :To ensuring that no banking activity goes on without supervision, irrespective of location, thus eliminating regulatory arbitrage; eliminating double leverage/gearing in the computation of capital adequacy of conglomerates; and ensuring that all the risks incurred by a banking group, no matter where they are booked will be evaluated and controlled on a global basis and to also,enable the CBN/NDIC identify more quickly, emerging problems and work with banking organisations and other supervisors as appropriate, to take prompt corrective measures on identified problems and help supervisors to gauge earlier, the effect of potentially adverse events on banking organisations and on the financial system in general."
The circular said, "One of the outcomes of the bank consolidation programme is increased competition within the sector and a heightened appetite by banks to become internationally active, particularly within the West African sub-region as well as, Europe and America."
According to the CBN,following the adoption of the universal banking in 2001 and the recent consolidation exercise, financial institutions in Nigeria have expanded their activities, often through subsidiaries beyond their traditional areas of operation.Financial groupings have thus emerged, combining banking, insurance, pension funds, discount houses, finance companies, primary mortgage institutions, micro-finance banks and securities businesses. From a regulatory perspective, the above developments have led to an appreciation of the limitations of the segmental approach to supervision in addressing some concerns.Such concerns, it explained, included what it described as "Contagion risk" -- the possibility that problems in one part of the group may affect other entities within the group.
In addition the apex bank said the banks have become more complex and less transparent with some of them having overseas branches/affiliates/subsidiaries and, therefore, more difficult to manage than institutions with more clearly defined mandate and more specific focus.
The CBN circular stated: "A network of complex and overlapping managerial and operational structures within a single conglomerate further accentuate the problem as risk diversification and risk-spreading arising out of this would also raise issues regarding risk management and risk-based supervision that may not be easy to address in a solo regulatory paradigm.
Arbitrage opportunities usually created by differing regulations and supervision standards among supervisory agencies as each of the subsidiaries in the group is supervised on a solo basis by the agency that oversees its sector of operation. The supervision of related entities on solo basis obscures the interdependencies that exist within groups.Against the background of the foregoing and the existence of multiple supervisory and regulatory agencies (CBN, NDIC, SEC, NAICOM, PENCOM, etc) as well as the need to embrace international best practice, the adoption of consolidated supervision of banks in Nigeria has become imperative."
The CBN, however, clarified that the proposed framework which would provide required guidelines for the CBN and NDIC in the implementation of consolidated supervision of banks in Nigeria would not stop other regulatory agencies from performing their statutory functions.
The basic objective of the planned consolidated supervision is the promotion of the overall evaluation of the strength of a group to which a bank belongs, in order to assess the potential impact of other companies in the group on the operations of the bank. The practice allows financial sector supervisors to understand the relationship among the legal entities and to assess and monitor how effectively the group identifies, measures, monitors and controls risks, and to recognise incipient problems.
The CBN's circular is to prepare the regulatory authorities to undertake a much more complex responsibility of regulating banks with subsidiaries and branches outside the nation as well as those that are engaged in non-banking businesses such as insurance, pension and securities.
The CBN circular reads in part: "In keeping with global trend and current best practice in supervision, the CBN in conjunction with the NDIC have developed the attached draft framework for the consolidated supervision of banks in Nigeria as a complement to the risk-based supervisory framework earlier released to the Nigerian banking industry in 2005."
It stated that the objectives are :To ensuring that no banking activity goes on without supervision, irrespective of location, thus eliminating regulatory arbitrage; eliminating double leverage/gearing in the computation of capital adequacy of conglomerates; and ensuring that all the risks incurred by a banking group, no matter where they are booked will be evaluated and controlled on a global basis and to also,enable the CBN/NDIC identify more quickly, emerging problems and work with banking organisations and other supervisors as appropriate, to take prompt corrective measures on identified problems and help supervisors to gauge earlier, the effect of potentially adverse events on banking organisations and on the financial system in general."
The circular said, "One of the outcomes of the bank consolidation programme is increased competition within the sector and a heightened appetite by banks to become internationally active, particularly within the West African sub-region as well as, Europe and America."
According to the CBN,following the adoption of the universal banking in 2001 and the recent consolidation exercise, financial institutions in Nigeria have expanded their activities, often through subsidiaries beyond their traditional areas of operation.Financial groupings have thus emerged, combining banking, insurance, pension funds, discount houses, finance companies, primary mortgage institutions, micro-finance banks and securities businesses. From a regulatory perspective, the above developments have led to an appreciation of the limitations of the segmental approach to supervision in addressing some concerns.Such concerns, it explained, included what it described as "Contagion risk" -- the possibility that problems in one part of the group may affect other entities within the group.
In addition the apex bank said the banks have become more complex and less transparent with some of them having overseas branches/affiliates/subsidiaries and, therefore, more difficult to manage than institutions with more clearly defined mandate and more specific focus.
The CBN circular stated: "A network of complex and overlapping managerial and operational structures within a single conglomerate further accentuate the problem as risk diversification and risk-spreading arising out of this would also raise issues regarding risk management and risk-based supervision that may not be easy to address in a solo regulatory paradigm.
Arbitrage opportunities usually created by differing regulations and supervision standards among supervisory agencies as each of the subsidiaries in the group is supervised on a solo basis by the agency that oversees its sector of operation. The supervision of related entities on solo basis obscures the interdependencies that exist within groups.Against the background of the foregoing and the existence of multiple supervisory and regulatory agencies (CBN, NDIC, SEC, NAICOM, PENCOM, etc) as well as the need to embrace international best practice, the adoption of consolidated supervision of banks in Nigeria has become imperative."
The CBN, however, clarified that the proposed framework which would provide required guidelines for the CBN and NDIC in the implementation of consolidated supervision of banks in Nigeria would not stop other regulatory agencies from performing their statutory functions.
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