1. BANK FAILURE RESOLUTION IN NIGERIA: THE BRIDGE BANK OPTION Being Paper Presented at the Workshop for Business Editors and Finance Correspondents Association of Nigeria (FICAN) at Manpower Development Institute, Dutse, Jigawa State Adeleke A. A. Director Asset Management Department, NDIC Bank Failure Resolution in Nigeria: The Bridge Bank Option. 128/11/2011

2. OUTLINE  Introduction  Applicable Failure Resolution Options:  Rehabilitation;  Deposits Pay-out;  Insured Deposits Transfer; and  Purchase and Assumption (P&A)  Bridge Bank Mechanism  Why Adopt Bridge Bank Mechanism?  Public Reaction / Challenges Bank Failure Resolution in Nigeria: The Bridge Bank Option. 228/11/2011

3. INTRODUCTION Effective resolution is a series of systematic action designed to end a bank’s distressed condition. Focus of a good resolution option:  Maintains public confidence and stability in the banking system.  Ensures fairness, equity, transparency and accountability.  Instills market discipline while discouraging moral hazards.  Achieves minimum disruption to payment system. Bank Failure Resolution in Nigeria: The Bridge Bank Option. 328/11/2011

4. INTRODUCTION  Speedy payment to insured depositors and quick realization of assets for the benefits of uninsured depositors and creditors.  Minimize the likelihood of having to bail-out uninsured depositors and creditors. A typology of problem banks  Illiquid but solvent  Insolvent but liquid  Illiquid and insolvent. Bank Failure Resolution in Nigeria: The Bridge Bank Option. 428/11/2011

5. RESOLUTION OPTIONS  Rehabilitation  Financial Assistance (Accommodation Facility).  Imposition of Holding Actions.  Change in Management.  Take-Over of Control & Management.  Acquisition & Sale of Banks.  Deposit Payout  Insured Deposits Transfer  Purchase and Assumption (P&A) Bank Failure Resolution in Nigeria: The Bridge Bank Option. 528/11/2011

6. Bank Failure Resolution in Nigeria: The Bridge Bank Option. 6 EXPERIENCE SO FAR  REHABILITATION  Take-Over Of Control 1 Bank in 1992 5 Banks in 1993 16 Banks in 1995 1 Bank in 1996 1 Bank in 1999  Sale of Banks 7 banks sold to new investors.

7. EXPERIENCE SO FAR - BANK FAILURE AND EXTENT OF FAILURE IN NIGERIA BETWEEN 1994 AND 2006 Year of Closure No of BanksTotal Assets(N’B) Total Deposits (N’B) Ratio of Assets of Close Banks to Total Assets of Banks Ind(%) Ratio of Assets of Close Banks to Total Deposits of Banks Ind(%) Ratio of Assets of Close Banks to GDP(%) Number of Depositors 199446.102.001.941.120.66 6,411 199510.400.800.090.380.02 7,416 19982634.6016.304.504.341.11 1,709343 200032.703.800.140.450.06 31,969 2002120.2011.600.680.950.35 228,585 200312.103.410.060.240.03 1,044 200613160.10177.281.234.690.55 961,211 TOTAL49165.9215.190.932.590.44 3,165,979 Bank Failure Resolution in Nigeria: The Bridge Bank Option. 728/11/2011

8. KEY STATISTICS TO CONSIDER  Significance of the Recent Banking Crisis  Total Deposits of Banks in the System – N11.371 trillion.  Eight (8) Intervened Banks Total Deposits – N2.984 trillion.  Three (3) Bridge Banks Total Deposits – N816.29 billion.  NDIC’s Risk Exposure N567.95 billion* as against DIF of N353.06 billion*.  Total Deposits of Forty-nine (49) Banks Closed prior to August, 2011 – N215.19 billion. Bank Failure Resolution in Nigeria: The Bridge Bank Option. 828/11/2011

9. KEY KEY STATISTICS TO CONSIDER (Cont (Cont’d)  Total Assets of Banks in the System – N16.542 trillion.  Total Assets of the 8 intervened banks – N3.950 trillion.  Total Assets of the 3 Bridge Banks – N895 billion.  Total Recapitalization required by 8 intervened banks – N1.638 trillion.  All Figures as at 31 st May, 2011. 28/11/2011Bank Failure Resolution in Nigeria: The Bridge Bank Option. 9

10. BRIDGE BANK MECHANISM  A new bank created to acquire assets and assume liabilities of the failed bank. It is a variation of P&A.  New bank could be privately owned or the government could create it for the purpose.  If government owned, it could be operated for about 2 years after which it would be sold to fresh investors. (i)Merits  Avoid losing the failed bank thus protecting jobs and continuing banking services to the community. 28/11/2011Bank Failure Resolution in Nigeria: The Bridge Bank Option. 10

11. BRIDGE BANK MECHANISM (Cont’d)  All shareholders would lose their investments.  All depositors and creditors would be covered and that would engender public confidence in the banking system. (ii)Demerits  Undermines market discipline as it encourages moral hazard.  It could be costly.  The bridge bank could fail thus postponing the “evil day” and aggravating the cost of resolution. 28/11/2011Bank Failure Resolution in Nigeria: The Bridge Bank Option. 11

12. IA22 OUTCOME OF IADI’s SURVEY  To maintain daily operations of a failed bank.  When number of failed institutions is very large and the failures occurred during a short period of time.  In cases where the Liquidator is reluctant to proceed with formal liquidation because either the failed bank is too large (so no adequate funds are available for reimbursement) or there is not enough time to market the bank’s assets to potential acquirers.  Bank with an attractive franchise is in danger of failing before acquirers can be found. 28/11/2011Bank Failure Resolution in Nigeria: The Bridge Bank Option. 12

13. WHY NDIC ADOPTED BRIDGE BANK MECHANI MECHANISM  Provided for in Section 39(1) of NDIC Act, 2006.  The 3 affected banks had attractive franchise and deterioration in their assets would hamper their sale.  Depositors were protected thus promoting confidence in the system by ensuring continuity of banking services.  Outright liquidation would have had dire consequences on depositors & other stakeholders.  The most cost effective option considering the size of the 3 banks, volume of deposits and number of their employees. 28/11/2011Bank Failure Resolution in Nigeria: The Bridge Bank Option. 13

14. P PUBLIC REACTION / CHALLENGES  Minimal or no panic withdrawals by depositors.  Market acceptance of assurance by Regulatory Authorities that all deposits were protected.  Some stakeholders felt measure taken was preferable to outright liquidation.  Delicate process of incorporating shelf companies that became Bridge Banks.  Court action by erstwhile shareholders.  Cumbersome, slow and bureaucratic judicial process. 28/11/2011Bank Failure Resolution in Nigeria: The Bridge Bank Option. 14

15. WRAP UP THANK YOU FOR LISTENING! Bank Failure Resolution in Nigeria: The Bridge Bank Option. 1528/11/2011