These days, sitting across the table from my banker friends, conversation rarely dwells for long on the import of the increased incidence of vehicular traffic (in the nation’s commercial capital) for the trade; even though more time spent commuting imposes severe costs on a profession whose frontline personnel are some of the more peripatetic in the country.
The way bankers tell it, they confront more pressing concerns. Government spending, business investments, and consumer spending have all been severely whittled by the drop in the nation’s primary export revenue earner. So, the outlook for the industry is necessarily dimmer: fewer deposits (and rising interest expenses as competition bids up cost); and increasingly limited opportunities to create risk assets.
Then, again, the jury is still out on the monetary authority’s response to the consequences of the drop in output. On one hand, there has been much back-slapping as a section of the commentariat applauds the central bank’s (CBN) ability to keep the naira “stable”, even as pressure continues to mount on the nation’s external reserves.
But the gains from this policy have been at considerable cost to other parts of the economy. The CBN’s current policy stance is impeding the economy’s access to global capital flows, including trade finance lines from banks’ (foreign) counterparties. And because a central plank of the CBN’s new initiatives comprises the restriction on 41 industrial sectors’ access to domestic foreign exchange markets, banks face a new order of problems: how to fund the letters of credit opened for their clients in the 41 sectors.
Understandably, the gloom in the industry is palpable on the back of these vulnerabilities. But the sense of foreboding is a lot much heavier at gatherings of the nation’s bankers, than is supported by just these variables. Times are when you can almost cut through the ambience with a knife. Increasingly, industry operatives (in the know) convey a sense of impending doom considerably out of sync with the macroeconomic and the industry numbers.
Talk of AMCON II is nearly always in the background. It would seem that a not so rare combination of governance failures, and a decelerating economy has saddled the banks with a burgeoning portfolio of bad loans. Yet, few bankers are willing to proffer an answer to the question: How reflective of actual conditions are the industry’s non-performing loan numbers? Whatever the true state of affairs is, there is a danger that the relatively stellar economic performance of the last 10 years has, like a rising tide lifted all manner of leaky vessels. Now that the tide is ebbing many boats may be beached.
In 2010, in the aftermath of the 2008/2009 global financial crisis, the central bank acted to support similarly leaky vessels in the industry. It set up the Asset Management Corporation of Nigeria (AMCON) — basically a “bad bank” — to take on the industry’s unhealthy assets, and free balance sheets, so banks could continue lending.
Fifteen years ago, the CBN’s books were a lot healthier, with reserves slightly above US$60bn. It was thus easy to finance the intervention. Today, with all key domestic indices migrating south, intervention along these lines would be well-nigh impossible. Yet, given the importance of the financial services sector, not to act in its support would be to compound the already dismal fortunes of the larger economy.
How then should the central bank intervene? Not by throwing life jackets and escape rafts at banks, their shareholders, or staff. But to prevent bank collapse in those cases where there is a real and present threat to the financial system and the larger economy. But more importantly, to intervene in a way and with means that do not encourage banks to do business in the manner that incessantly leads them back (like homing pigeons) into these cul-de-sacs.
AMCON clearly failed this test. The burden of its adjustment was borne by shareholders — whether through loss of control over their banks, or because the surviving banks had to surrender part of their profits to fund AMCON. However, this difficulty of structuring incentives that optimise the agency dilemma is not native to these parts. In principle, the goal is to get shareholders to hold their professional managers to more exacting standards. But where shareholding is as diffuse, as it often is, this goal is easier described than achieved.
Better therefore, along with the costs to shareholders of their negligence, to include penalties for individual bankers, whose acts (or failure so to) either created these vulnerabilities, or exacerbated them. Oftentimes, these failures border on the criminal.
Alas, I can only imagine that any plan to “rescue-in” bank staff as part of a new industry support arrangement cannot be any consolation to my bank friends.