Mitigating Risks in Nigerian Banking Sector 

In this piece, James Emejo aggregates analysts’ perspectives on the US banking crisis and the lessons for Nigerian financial system stability

The collapse of Silicon Valley Bank (SVB) on March 10, 2023, following a bank run, marking the second-largest bank failure in United States history – and the largest since the 2008 financial crisis, as well as the similar distress of New York-based Signature Bank, had sent shockwaves across the global financial landscape – and elicited reactions across the world.

The development has also stressed the Nigerian financial system’s need for proper regulatory oversight. 

According to reports, SVB’s deposits increased from $62 billion in March 2020 to $124 billion in March 2021, benefiting from the impact of the COVID-19 pandemic on science and technology.

Most of these deposits were invested in long-term Treasury bonds as the bank sought a higher return on investment than was available on shorter-term bonds.

These long-term bonds fell in current market value as interest rates rose during the 2021–2023 inflation surge, and they became less attractive as investments.

In April 2022, SVB’s chief risk officer stepped down, and a successor was not named until January 2023—a period coinciding with interest rate increases.

Seeking higher investment returns, in 2021, SVB began shifting its marketable securities portfolio from short-term to long-term Treasury bonds. The market value of these bonds decreased significantly through 2022 and into 2023 as the Federal Reserve raised interest rates to curb an inflation surge, causing unrealised losses on the portfolio.

Higher interest rates also raised borrowing costs throughout the economy, and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. To raise cash to pay withdrawals by its depositors, SVB announced on March 8 that it had sold over $21 billion worth of securities, borrowed $15 billion, and would hold an emergency sale of some of its treasury stock to raise $2.25 billion.

The announcement and warnings from prominent Silicon Valley investors caused a bank run as customers withdrew $42 billion by the following day.

However, rather than mere investment missteps, analysts have pointed to possible insider abuse in the affected banks.

 FDIC Intervention

 On March 10, 2023, the California Department of Financial Protection and Innovation seized SVB and placed it under the Federal Deposit Insurance Corporation (FDIC) receivership. 

About 89 per cent of the bank’s $172 billion in deposit liabilities exceeded the maximum insured by the FDIC, which later received exceptional authority from the Treasury and announced jointly with other agencies that all depositors would have full access to their funds the next morning.

Seeking to auction off all or parts of the bank, the FDIC reopened it on March 13 as a newly organised bridge bank, Silicon Valley Bridge Bank.  Although some characterised the government response as a bailout, the plan did not entail rescuing the bank, its management, or its shareholders but rather making uninsured depositors whole from the proceeds of selling the bank’s assets without the use of taxpayer money.

The collapse of SVB had significant consequences for startups in the US and abroad, with many briefly unable to withdraw money from the bank. Other large technology companies, media companies, and wineries were also affected. This was the bank of choice for several founders and venture capital backers. Its stock price roughly tripled from 2018 to 2021.

Also, a second US financial institution, Signature Bank, faced a similar problem. SVB’s collapse prompted many customers to withdraw their deposits out of a similar concern over liquidity risk.

About 90 per cent of its deposits were uninsured.

According to reports, while SVB and Signature Bank were complying with regulatory requirements, the composition of their assets was not in line with industry averages.

A signature had just over five per cent of its assets in cash, and SVB had seven per cent, compared with the industry average of 13 per cent. In addition, SVB’s 55 per cent of assets in fixed-income securities compare with the industry average of 24 per cent.

 Need for Enhanced Regulatory Environment 

 The fall of both SVB and Signature Bank has continued to create global ripples with reactions from governments and businesses. 

While reacting to the development, the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, advised central bankers and regulators worldwide to be vigilant and guard against failures of financial institutions in their jurisdictions.

Emefiele, who spoke at the opening of the 2023 African Central Bank Conference held at the Global Leadership Center, Johannesburg, South Africa, also advised governors of central banks and other African financial sector regulators to improve their supervisory roles to forestall any run-on financial institutions in their countries.

Commenting further on the current global dynamics and specific policy developments in Nigeria to address emerging shocks, he advised central banks on the continent to draw lessons from the recent failure of Silicon Valley Bank and Signature Bank in the United States of America by putting in place regulations that will prevent any run-on banks in their countries.

The CBN governor said, “A major reason that contributes to bank failures is when the bank cannot meet depositors’ demands for their money. This usually results in a run. There is a need for regulators to insulate the banking system from collapse.

“The devastation to lives and livelihoods caused by the COVID–19 globally. And after COVID-19, we started seeing economies develop again; the numbers were good, and financial market conditions were better; suddenly, in 2022, another crisis came, the war between Russia and Ukraine that has unfortunately created for the global economy. 

“All the forecasts made by the IMF and World Bank have begun to go south, and inflationary pressure began to climb.”

Emefiele highlighted measures the CBN took after the subprime mortgage crisis that led to the collapse of global financial institutions to avoid contagion effects on banks in the country.

He also shared Nigeria’s experience in regulating banks, noting that the threats posed to the financial system necessitated the release of new guidelines and regulations to tackle potential infringements and, in the process, protect depositors’ funds and promote greater transparency in the sector. 

According to him, regulators must be alive to their responsibilities by ensuring that banks under their regulatory watch are financially healthy and do not suffer a similar fate as the Silicon Valley Bank, which, until its collapse recently, catered to many of the world’s most powerful tech investors.

He said: “Regulators must be prepared for the rainy day. What umbrella have you built to ensure that depositors don’t face the risk of losing their deposits? That should be a lesson to regulators globally.

“People have always said that the Nigerian banking system is one of the most regulated. We are not saying there are no cases where banks have a crisis in Nigeria, but we try as much as possible to ensure that we insulate the banking system from serious occurrences.

“It is only in Nigeria and very few countries in the world that you would hear that if a bank collects, for instance, $100 from a customer as a deposit, today, $32.5 of that must be kept at the CBN.

“It is to keep that fund to make sure in this situation where they are crisis; we also maintain that bank would maintain a specified liquidity ratio, and it is only in Nigeria that we insist that banks must have a minimum level of capital adequacy ratio.

“It is Nigeria and some few countries in the world that if you are a young bank, after declaring profit, we insist that 25 per cent must be held in a statutory reserve fund to boost your retained earnings and capital adequacy ratio. These are the kind of things regulators need to begin to look at increasingly.

“So, as a regulator, you need to think of how to insulate your banking industry. Regulators must begin to be much more responsible. We have often said that in Nigeria, we believe that when there is a crisis, we make sure that depositors are protected and that no depositor loses their money.”

He stressed that bad loans were major factors that kill financial institutions, reiterating the need for regulators to be more responsible.

Liquidity Over Profitability 

Speaking to THISDAY on the development, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the lesson to financial institutions is that there is a myriad of faulty investment decisions that could collapse their institutions. 

He said liquidity of the institution should take preeminence over profitability Board of Directors should not contribute to such collapses due to lapses in their oversight functions.

Ekechukwu said government policies, especially monetary policy, should not stifle financial institutions, adding that Banks and other financial institutions should always have their eyes on Capital, Asset Quality, Management Quality, Earnings, and Liquidity (CAMEL).

He said: “In 1995, one of the oldest banks in the UK, a 200-year-old Barings Bank, collapsed due to some unauthorized investments done by one Nick Leeson in Derivatives portfolio that lost $1.8 billion.”

On his part, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said

the banking crisis in the US could be attributed to a failure in risk management and the apparent negligence of regulatory authorities to curtail the losses before they became irredeemable.