NDIC as a Bank Supervisor

A lecture presented at
TRAIN-THE-TRAINERS PROGRAMME
For University of Lagos
By:
M. M. Ibrahim
Director Research, Policy and International Relations Department

December, 2019
 Outline
• Introduction
– Definition of bank supervision
– Objective of regulation/supervision
– Broad process involved in bank supervision
• Rationale for bank regulation/supervision
• Supervisory activities of the NDIC
– Forms of Bank supervision
– Methodology of supervision
– Scope of supervision
• Recent Developments in Banking Supervision
– IFRS
– Basel I-III
– Systemic Important Financial Institutions
• Supervisory Challenges facing NDIC
• Conclusion
 INTRODUCTION
• The Nigeria Deposit Insurance Corporation (NDIC)
is a specialised agency of the Nigerian Government
established on 15th June 1988 with the following
mandate:
– Deposit Guarantee

– Banking Supervision

– Failure Resolution

– Bank Liquidation
 INTRODUCTION

• Bank supervision is a statutory function,

performed by a specialised agency, that entails
monitoring of commercial banks and other
banking institutions for
– compliance with written rules that define
acceptable behaviour and conduct of the financial
institutions such that their activities are consistent
with
– promotion of safe, sound and stable financial
system which, in turn, leads to
– enhanced growth and development of the real
sector in particular and the economy as a whole.
 INTRODUCTION
Banking supervision generally seeks to reduce the potential risk of
failure and ensures that unsafe and unsound banking practices do not
go unchecked.

Specifically, it aims to:

– Safeguard the financial system against risk of disruption and mass failure of
banks

– Reduce the level of risk to which bank, depositor, creditors and other
stakeholders are exposed to

– Minimise Money Laundering activities in the financial system

– Enhance the efficiency of the financial system

– Supporting productive and social activities by channelling resources to

priority sectors of the economy
INTRODUCTION

• Books and affairs of every licensed insured institution are

examined as a means of meeting its supervisory mandate.

• This function is performed through the off-site

surveillance and on-site examination (to be discussed
later) of the books and affairs of the banks.

– Exceptions are reported,

– Recommendations made on how the observed lapses can be
corrected, and
– The implementation of such recommendations is monitored
through scheduled post examination visits to the affected banks.
 RATIONALE FOR BANK REGULATION
What necessitates regulation/supervision?
• Nature of Banking Business
– Large fiduciary responsibility over cash assets in the economy
– Financial intermediation function
– Operator of the payment system
– Trading on largely OPM/OPC

• Historical record of cost and pains of bank failure

– Global financial crises
– Bank runs
RATIONALE FOR BANK REGULATION

• Pre-crises conditions that make Banks vulnerable (Wellink, 2008)

– a large amount of pre-crisis, system-wide liquidity, which led to
excessive risk taking;
– inadequate measures to contain leverage, maturity mismatches, risk
concentrations and the erosion of liquidity buffers over the credit cycle;
– regulatory gaps, which left important segments of the financial system
under regulated;
– poor incentives in regulatory frameworks;
– poor underwriting standards
– outsourcing of the due diligence process to the rating agencies; and
– Fundamental shortcomings in financial institution’s governance, of
which the current risk management shortcomings are just a symptom.
RATIONALE FOR BANK REGULATION
• Lessons of History: Bank Failures in Nigeria

– The period between 1947 and 1952 witnessed a rapid growth of

indigenous banks in Nigeria. This was before the establishment of
the Central Bank of Nigeria in 1958, which commenced operations
in 1959.
– The increase in the number of indigenous banks was followed also
by a high rate of failures of such banks. By 1954, twenty-one (21)
out of twenty-five (25) indigenous banks operating in Nigeria had
failed.
– The experience of bank failures in Nigeria in the 1950's was a sad
affair for bank officials, depositors and government.

– Since the Federal Government of Nigeria did not want Nigerians to

relive those experiences, it was considered that the establishment
of a Deposit Insurance Scheme was urgently needed.
RATIONALE FOR BANK REGULATION
• Lessons from Other Countries
– Following the experiences of successful implementation of
DIS by countries like the former Czechoslovakia which
established a nationwide deposit insurance scheme in
1924 and the United States of America which established
its own nationwide scheme in 1933 to revamp their
banking systems and by extension their respective
economies, many countries, including Nigeria, joined the
league of nations with DIS.
RATIONALE FOR BANK REGULATION
• Anticipated Consequences of Economic Reforms on Banking
Supervision.
– The Structural Adjustment Programme (SAP) embarked upon by
government in 1986 was aimed at deregulating the economy and
removing all distortions created by the hitherto administrative policies of
government.
– It was envisaged that since the reform involved the liberalisation of the
bank licensing process, there would be a substantial increase in the
number of licensed banks to be supervised by the CBN.

– The establishment of an explicit deposit insurance scheme with

supervisory powers over insured institutions was expected to complement
the supervisory efforts of the CBN.

– Since the establishment of the Corporation in 1989, it has been possible

for both institutions (the CBN and NDIC) to carry out routine and special
examinations of licensed banks more frequently than before despite the
increase in the number of banks.
RATIONALE FOR BANK REGULATION

• Increased Competition Among Banks

– Whereas, competition is good for individual banks, the
customers, and the banking system, increased competition
could encourage, excessive risk-taking with depositors’ funds.

– It was therefore necessary to protect the depositors, especially

the small ones, against loss of the their deposits from excessive
risks undertaken by their banks.
Rationale for Bank regulation (Contd.)
• Change in Government Bank Support Policy
– Prior to the establishment of the Corporation, government had been
unwilling to let any bank fail, no matter the bank’s financial condition
and/or quality of management. Government was apprehensive of the
potential adverse effects on confidence in the banking system and in
the economy generally following a bank failure.

– Consequently, government deliberately propped up a number of

inefficient banks over the years, especially those banks in which state
governments were the majority shareholders.

– In the new economic policy of government dictated by the imperatives

of the Structural Adjustment Programme, it was felt that there was
the need to shift emphasis from direct support of banks to prevent
failure to one of protecting the deposits of customers, especially the
small depositors who are usually less informed about their banks than
the large, sophisticated customers.
SUPERVISORY ACTIVITIES OF THE NDIC
• Forms of Bank supervision
– Off-site surveillance
– On-site examination

• On site examination
– This entails examination of a bank’s reports, document and other
materials within the premises of the bank, and the reconciliation of the
information derived from the examined documents with physical
realities/assets such as cash and other inventories to determine whether
– the bank complies with the bank regulation
– the returns sent by the bank are congruent to physical realities in the
bank
– the results/findings of the off-site analysis of the bank’s return describe
the bank’s financial risk performance
SUPERVISORY ACTIVITIES OF THE NDIC

• Off-site Surveillance
–Off-site supervision involves the receipt and analysis of returns
from insured banks on a periodic basis to ascertain the banks’
compliance with prudential regulations.

–Returns, basically, are requirements of the

regulatory/supervisory authorities from the banking
institutions which are made on determined periodic basis to
assist in ensuring that the banks conform to desired operating
rules.
SUPERVISORY ACTIVITIES OF THE NDIC

– Two categories of regulatory returns can be identified: statutory

and non-statutory returns.

– Statutory returns are the returns that must be made by financial

institutions as provided for in various acts governing the banking
business.

– Non-statutory returns on the other hand are those returns

which the regulatory/supervisory authorities can require from
banks in their day to day operations. These non-statutory
returns are usually called for by means of circulars or
questionnaires.
SUPERVISORY ACTIVITIES OF THE NDIC-
Methodology of Supervision

• Compliance/Transaction Based Supervision

• Risk Based Supervision
• Compliance-based examination
– also known as rule or principle-based.
– A method of examination which involves checking for and
enforcing compliance with rules – legislation, regulations or
policies – that apply to a bank or a given banking industry.
– However, it is a reactive, and not proactive, form of
supervision. It is static and less useful in a dynamic,
constantly-evolving world
 SUPERVISORY ACTIVITIES OF THE NDIC-
Methodology of Supervision (Contd.)
• Risk Based Supervision (RBS)
– A structured process aimed at identifying the most critical risks
that face each bank and through a focused review by the
supervisor to assess the bank’s management of those risks and
the bank’s financial vulnerability to potential adverse experience.

– Risk Based Supervision is a comprehensive, formally structured

system that assesses risks within the Risk Based Supervision
financial system, giving priority to the resolution of those risks.

– Special effort is made to understand the environment in which

the deposit taking financial institution operates.
SUPERVISORY ACTIVITIES OF THE NDIC
RBS (Contd.)
– The inherent risks are identified, the Risk Management Control
Functions are appraised to the extent used to mitigate the risks.

– RBS is gradually becoming the dominant approach to regulatory

supervision of financial institutions around the world.

– Emphasis is placed on the RMCFs (Board, Senior Management,

Risk Management, Internal Audit, Compliance and Financial
Analysis) capacity to manage the inherent risks i.e. Credit,
Operational, Liquidity, Market etc.
SUPERVISORY ACTIVITIES OF THE NDIC
- RBS (Contd.)
– It is a robust, proactive and sophisticated supervisory process,
essentially based on the risk profiling of a bank;

– It enables a better evaluation of risks through the separate

assessment of inherent risks and risk management processes;

– It is a dynamic, forward looking process, placing greater emphasis

on the early identification of emerging risks and system-wide
issues

– It allows the supervisor to prioritize efforts and focus on

significant risks by channeling resources to banks that have higher
risk profiles.
SUPERVISORY ACTIVITIES OF THE NDIC –
Scope of Bank Supervision

Scope of Bank Supervision

• Solo Based Supervision
• Consolidated Supervision
• Cross Border Supervision

• Solo Based Supervision

– Solo examination focuses on a single bank, its distinct
individual operations, risk profile and management.
– This supervisory approach focuses on individual group
entities. Individual entities are supervised on a solo basis
according to the capital requirements of their respective
regulators.
SUPERVISORY ACTIVITIES OF THE NDIC-
Consolidated Supervision

• Consolidated Supervision
– This is a general qualitative assessment of the group as a whole
and, usually, by a quantitative group-wide assessment of the
adequacy of capital.

– A qualitative and quantitative assessment of the strength of

those business groups which contain banks (and other regulated
financial institutions) in order to identify and evaluate all the
risks to which the banks are exposed.
 Supervisory Activities of the NDIC-
Consolidated Supervision
• Rationale
– Some banks are themselves subsidiaries and exposed to risks arising
from the influence exercised over them by their parents.
– Many banks and subsidiaries are exposed to risks arising from the
influence of parent companies.
– The impact of the global melt down showed that some events could
have been projected if regulators/supervisors had adopted a holistic
approach rather than resolving issues from a ‘’solo’’ perspective.
– Consolidated supervision is an essential element of risk based
supervision.
– The adoption of Universal Banking in Nigeria in 2001 brought
additional challenges to the Regulatory Authorities. As such, many
banks carried on activities through subsidiaries/affiliates.
SUPERVISORY ACTIVITIES OF THE NDIC–
Consolidated Supervision (Contd.)
• Objectives of Consolidated Supervision
– Supports principle that no business segment risk escapes.
– Supervision prevents over leveraging of Capital (Double Gearing)
control.
– Evaluates strength of the Group Consolidated Financial
Resources.
RECENT DEVELOPMENTS IN BANKING SUPERVISION
- IFRS

• International Financial Reporting Standards (IFRS)

– It is a single set of high quality, understandable, and
enforceable global accounting standards developed and
published by the International Accounting Standards Board
(IASB) to be used by entities in preparing general purpose
financial statements and other financial reporting.

– It includes International Accounting Standards:

RECENT DEVELOPMENT IN BANKING SUPERVISION –
IFRS (contd.)

– It provides general guidance for the preparation of financial

statements, rather than setting rules for industry-specific
reporting.
– Having a single set of high-quality globally accepted accounting
standards is important especially in increasingly global capital
markets.
– Additionally, using one set of standards globally would have the
“potential to improve financial-statement comparability in any
part of the world.”
– IFRS are designed for use by profit oriented entities. Also,
entities engaging in not for profit activities may also find IFRS
useful and adopt if considered appropriate.
RECENT DEVELOPMENT IN BANKING SUPERVISION –
Basel I-III

• Basel I
– Basel I provided the platform for the international harmonization of
a set of principles towards Risk Based Supervision.
– Capital requirements cover credit risk (only) but with inherent buffer
for other risks
– Exposure value * Risk weight = Risk Weighted Asset
– Simple credit risk-weighting structure varies over the following
range: 0%, 10%, 20%, 50%, 100%.
– Based on generic nature of borrower rather than borrower’s specific
financial characteristics or credit history
RECENT DEVELOPMENT IN BANKING SUPERVISION –
Basel I (contd.)

• BASIC APPROACH:
– Assign each asset or off-balance-sheet item held by a bank to
one of different risk categories
– Calculate the capital requirement for each asset or item based
on the risk weighting
– Add all these amounts together to calculate the total RWA
– Banks to hold, as a minimum, capital that represents 8% (10% or
15% in Nigeria) of their risk-weighted assets.
– Risk Weighted Capital Ratio = Capital
Risk Weighted Assets (RWA)
– Risk Weighted Capital Ratio (Cook’s Ratio) ≥ 8%
– Minimum Required Capital = RWA * 8%
– Nigeria adopted 10% instead of 8%
RECENT DEVELOPMENT IN BANKING SUPERVISION –
Basel I (contd.)
• Advantages of Basel I
– Created an internationally recognized standard

– Adopted worldwide (+100 countries)

– Contributed to financial stability

– Reversed a downward trend in international capital levels

– Promoted a level playing field among internationally active

banks

– Relatively simple approach

Recent Development in Banking Supervision –
Basel I (contd.)

• Weaknesses of Basel I
– Capital requirements do not always reflect economic risk

– Does not address innovation in risk measurement and

management practices

– Arbitrage opportunities e.g. through securitization

– Little recognition of credit mitigants

– OECD Club-rule
Recent Development in Banking Supervision –
Basel II
• Basel II is titled ‘International Convergence of Capital
Measurement and Capital Standards: A Revised Framework’

– It is based on three defining Pillars

– Minimum Capital Requirements,
– Supervisory Review and
– Market Discipline

– It describes a more comprehensive measure and standard

for capital adequacy that seeks to improve on the existing
Basel I rules by aligning regulatory capital requirements
more closely to the underlying risks that banks face.
Recent Development in Banking Supervision –
Basel II (Contd.)

– The framework requires banks to measure the riskiness of their

assets with respect to credit, market and operational risks.
– It seeks to ensure that risks inherent in banks’ portfolios are
better reflected in the minimum capital requirements, risk
management practices and accompanying disclosures to the
public.
– Notably under the revised framework, the definition of what
qualifies as regulatory capital and the minimum risk weighted
capital ratio requirement remains substantively unchanged from
the Basel I requirements.
RECENT DEVELOPMENT IN BANKING SUPERVISION –
Systemically Important Financial Institutions (SIFIs)
• Systemically Important Financial Institutions (SIFIs) are those banks
whose failure generates severe undesirable externalities that include
disruption of the financial system and the real economy

• According to the Financial Stability Board described G-SIFIs as "financial

institutions whose distress or disorderly failure, because of their size,
complexity and systemic interconnectedness, would cause significant
disruption to the wider financial system and economic activity
RECENT DEVELOPMENT IN BANKING SUPERVISION –
SIFIS (CONTD.)

• Focus on SIFIs came in the wake of global financial crises of

2007, and the roles of SIFIs in the crises
• Classification of a Bank as a SIFI: factors
– Size
– Interconnectedness
– Substitutability
– Complexity
RECENT DEVELOPMENT IN BANKING SUPERVISION –
SIFIs (contd.)

Supervisory Framework for SIFIs

1. Higher Loss Absorbency
– Banks designated as SIBs would be required to maintain a minimum CAR of
15%
– out of which Tier 2 capital should not constitute more than 25% of the
qualifying capital.
– In other words, Tier 1 capital should be at least 75% of the bank’s qualifying
capital.
– In addition, SIBs in Nigeria would be required to set aside Higher Loss
Absorbency5 (HLA) or additional capital surcharge of 1% to their respective
minimum required CAR. This should be met with Common Equity Tier 1
(CET1) capital6.
– The aim of the additional loss absorbency requirement is to ensure that
the SIBs have a higher share of their balance sheet funded by instruments
that re-enforce the resilience of the institution as a going concern.
RECENT DEVELOPMENT IN BANKING SUPERVISION –
SIFIs (contd.)

Additional Regulatory/Supervisory Requirements for SIFIs (Contd.)

2. Liquidity Standards
• The current liquidity ratio requirement for banks shall be
imposed on the SIBs; however, this would be subject to
change from time to time.
3. Stress Testing
• Stress testing requirements are designed to work in tandem
with the capital plan. The results of the test would be used to
make appropriate changes to the bank’s capital structure.
• The SIBs would be required to carry out stress test of their
capital and liquidity on a quarterly basis and the result of the
stress test would be reviewed by the Central Bank of Nigeria.
RECENT DEVELOPMENT IN BANKING SUPERVISION –
SIFIs (contd.)

Additional Regulatory/Supervisory Requirements for SIFIs (Contd.)

4. Recovery and resolution Planning
• The SIBs shall be required to develop specific recovery plan
which shall be submitted to the Central Bank of Nigeria
and Nigeria Deposit Insurance Corporation by 1st January
of every year.
5. Enhanced Supervision
• There shall be greater frequency and intensity of on-site
and off-site supervision of SIBs. Monthly monitoring of the
key performance indicators of the SIBs shall be carried out
by the CBN in order to ensure their safety and soundness
as well as the going concern status of the banks.
RECENT DEVELOPMENT IN BANKING SUPERVISION –
SIFIs (contd.)

Additional Regulatory/Supervisory Requirements for SIFIs (Contd.)

6. Disclosure Requirements
• The SIBs shall make quarterly disclosures of their financial
condition and risk management activities in relation to
– Risk governance and risk strategies/business model
– Capital adequacy and risk weighted assets ICAAP Policy and
Computation
– Liquidity/Funding
– Market risk
– Credit risk
– Operational risk
– Other identified risks
Supervisory Challenges
Public Perception of the Deposit Insurance Scheme (DIS)
– The concept and operational modalities of the DIS are still being
confused with those of conventional insurance business for protection
against fire, marine losses, motor insurance, life insurance, et cetera
which started as far back as the early 1920s in Nigeria.
– Whereas, the conventional insurance involves a contract between two
(2) parties only: the insured and the insurer, there are three (3) parties
to a deposit insurance contract: the deposit insurer, the depositor who
does not pay insurance premium and the bank that pays the premium.
– Both the depositor and the bank benefit from the insurance guarantee.
While the depositor is protected, the bank is supervised and assisted in
times of problems.
– Unlike the regular insurance, the deposit insurance actually seeks to
reduce the risk being insured against through various risk minimisation
measures. In addition, in conventional insurance, the premium charged
is supposed to be commensurate with the perceived level of risk
inherent in the insured person, property or organization.
Supervisory Challenges (Contd.)
• The Incidence of Distress in Other Deposit-taking Institutions
– Although the incidence of distress among insured banks has, to a large extent,
been contained there is still the need to address the emerging distress in the
system as well as look beyond these institutions and extend similar treatment
to other distressed deposit-taking institutions as can be found amongst the
Microfinance Banks (MFBs) and the Primary Mortgage Institutions (PMIs).
– This is because of the interdependence of these segments of the banking
system on the (mainstream) insured banks.

• Inadequate Information Disclosure

– Banking supervision remains an integral part of the mechanism for ensuring
safe and sound banking practices and hence for ensuring depositors’
protection by a DIS that is designed to serve as a risk-minimiser.
– The Corporation has noted with serious concern the integrity problem with
the data supplied by the insured banks and which serve as input for
monitoring their health status. In particular, the significant disparity between
on-site and off-site supervision data has remained a major area of concern.
Supervisory Challenges (Contd.)
• Depositor Apathy and Ignorance
– Once a bank is closed, insured depositors are expected to file
claim for their insured deposits with the NDIC within eighteen (18)
months.
– However, in spite of the various public enlightenment measures
adopted by the NDIC, many insured depositors are yet to file their
claims even in banks where 100 percent liquidation dividend had
been declared.
– While the low depositors’ response could be partly attributed to
the fact that some of them had small deposit balances with the
closed banks, ignorance and apathy on the part of many
depositors could have played a significant role.
– It is of concern to note that included amongst these depositors are
Agent Banks appointed to pay claims of depositors on the behalf
of the Corporation, yet such banks default in filing their own
claims.
Supervisory Challenges (Contd.)
• Prompt Settlement of Guaranteed Deposits
– Deposit insurance guarantee is primarily intended to reimburse insured
depositors promptly when their banks fail.
– The insured depositors need to be promptly reimbursed in order to
cushion the adverse effects of bank failure and to minimize the
likelihood of deposit runs on other banks, thus promoting public
confidence and stability of the banking system.
– The best practices for the DIS issued by the IMF had recommended a
period 30 days within which insured depositors should be reimbursed.
– In practice, NDIC had not been able to achieve the desired target period
for settling insured deposit claims in many banks for a number of
reasons. The state of records of many of the closed banks, especially
those that closed their doors to the public for a longer period of time
before their licences were revoked, had made the compilation of
information very difficult and protracted.
– Some of the banks were not fully computerised and had wide branch
network. For instance, the 26 banks closed in January 1998 had about
342 branches spread over 32 states and the Federal Capital Territory.
Supervisory Challenges (Contd.)
• Vulnerable Revenue Base
– The Corporation is statutorily prohibited from meeting its
operating expenses from the Deposit Insurance Fund (DIF),
which is an accumulation of the premium contributions
from insured banks. Such operating expenses are to be
defrayed from income generated by investing the DIF.
– The investment of the DIF is also restricted to treasury
instruments whose yields have been volatile due to the
general macro-economic condition of the country, thus
making the revenue base for the implementation of the
scheme to be highly vulnerable.
Supervisory Challenges (Contd.)
• Legal Constraints
The legal challenges facing the NDIC include the following:
 Inadequate Legal Provisions
– A deposit insurer, while acting as a liquidator of closed bank, is
supposed to be vested with special powers.

 Legal Actions by Owners of Closed Banks

– It should be apparent after the revocation of the licenses of 36 banks,
that the power to revoke a bank’s license is so weighty that it can only
be exercised in the interest of the banking system and not frivolously .

 Cumbersome and Protracted Judicial Process

– The existing court processes and procedures appear slow and
cumbersome and therefore cannot assist in the prompt recovery of
debts owed to banks and address the financial malpractices in banks.
 Conclusion
• The foregoing has touched key issues in supervision
of financial institutions in the banking industries in
Nigeria.

• Understanding these issues will help in appreciating

the tools, strategies and policies of bank supervision
employed by the NDIC.
Thank you