Sanusi was determined to save the Nigerian financial system from distress and wanted sound banks that could operate in discrete niches of the economy whether large, medium or small. In my considered view, despite whatever shortcomings that could be ascribed to both reforms (there are no perfect reforms!), both visions and reforms were necessary and, in fact, complementary. Without consolidation, most of Nigeria’s banks would not have had a hope and a prayer of surviving the global financial crisis, and Sanusi could therefore not have been able to save the too many banks that would have had to fail. And without the Sanusi-led reforms, Nigeria’s banking system might have remained a vainglorious den of corporate iniquities that would have passed for ‘banking”.
Third, Sanusi-led reforms imposed accountability on bank executives at a time and in a manner that no other jurisdiction did. Ben Bernanke, the recently retired chairman of the board of governors of the U.S. Federal Reserve Bank, has published his memoir titled “The Courage to Act”. He regretted the absence of accountability for the bankers who threw the global financial system into a near-collapse and the world economy into a recession, and noted that some bankers should have gone to jail. In Nigeria, the Economic and Financial Crimes Commission (EFCC) commenced the prosecution of a number of bankers at the request of Governor Sanusi, and has secured a conviction in one case.
Fourth, the stabilization of the banking system under Governor Sanusi was accomplished without the direct injection of fiscal resources, which was different from the experience of many other jurisdictions after the global financial crisis. Moreover, Nigeria became the only banking jurisdiction in which banks, including those that were not stressed, have had to (grudgingly but gallantly!) contribute their own resources to ensure financial stability. A Sinking Fund was established for AMCON to ensure that, beyond the asset management corporation’s recovery of bad debts, additional support from the CBN and the commercial banks is contributed annually to ensure an orderly exit from the financial implications of the banking crisis.
Risks nevertheless remain because the bonds issued by AMCON were guaranteed by the Federal Government of Nigeria and thus remain a contingent liability. It is important to ensure that AMCON makes as much recoveries as possible of bad debts, and that a moral hazard problem be avoided for the future. That problem could be instigated by an impression that AMCON, or an AMCON-like structure would always be around to bail badly-run and failed banks. Just who will bear such costs in the difficult economic environment that exists and may do dwell with us for a while? The cost of doing this again may be too high. The alternative is for the CBN to proceed to develop a clear framework of financial stability that draws on the concept of “living wills” developed by banks for their possible death and orderly funeral in order to avoid the painful phenomenon of inflicting financial losses on either public institutions or depositors when banks fail.
Policy choices
The Sanusi-led banking reform faced three important policy choices. The first choice was that of what approach to adopt in communicating the deep distress within the Nigerian banking system in 2008/2009. Although it was apparent to many in the Nigerian financial sector, and increasingly to the public (no thanks to bank executives “de-marketing” competitor banks by highlighting their weaknesses to potential and actual clients), Soludo repeatedly sought to reassure the Nigerian public that the financial system was not under threat of collapse and that things were under control. Doubtless, the central bank wanted to avoid bank runs and almost certainly had plans up its sleeve to deal with the situation at hand (I had not joined the bank by this time and so cannot speak authoritatively about this specific issue). But, while its effectiveness in this instance can be questioned, this approach was not unusual in central banking. As Ben Bernanke revealed in his memoirs, when he and Hank Paulson, the US Secretary of the Treasury, went to brief the US Congress on the financial crisis, they did not reveal the full scale of what they knew of the situation lest the political establishment panic and take knee-jerk actions.
Sanusi, on the other hand, made a policy choice to disclose that several banks were in a grave situation, but simultaneously announced policy decisions such as guarantees of the interbank system and creditors’ funds which was aimed at calming the nerves of several stakeholders, prior to embarking on reforms. Even Sanusi, however, still not disclose all he knew, for, had he done so, the confidence he sought to restore might have evaporated even before he started his reform programme!
The second policy choice was between market discipline and financial stability. If a banking business is badly run, should it not suffer the market discipline of being allowed to fail? The answer may appear straightforward but when, as was the case at the time in question, the failure of one bank may trigger systemic failures of several other banks that were also weak, the cost to national economies and societies may be considered too much and a larger scale bailout may become necessary. This was the argument for systemic financial stability versus individual bank failures. The globalization and financial interconnectedness of financial systems that was already prevalent by 2008 introduced this new dynamic into central banking and banking regulation as a reality of our time. The point is that, having experienced the huge costs of maintaining financial stability in the aftermath of that crisis, public policy in many mature jurisdictions has been looking at how to accomplish the aim of financial stability and still have the banks, which are ultimately private businesses, bear the costs of their own failure. Hence the policy approaches of increasing equity and reducing leverage in the banking sector, and of “bail-in” in which bondholders and other creditors of banks bear the costs of bank failures by losing part of their investments, as opposed to bailouts with public funds.
Being a keynote speech at the Commerzbank Investment Banking Conference for African Banks, Frankfurt, Germany, October 20, 2015.
Kingsley Chiedu Moghalu
