The Director, Bank Examination Department, Nigeria Deposit Insurance Corporation during the annual seminar organized by the NDIC for the Business Editors and Finance Correspondents Association of Nigeria (FICAN), recently held in Gombe.
The event was tagged 2021 FICAN Workshop with Theme; Enduring Extreme Disruption: Resilience & Reinvention for Banking System Stability and Deposit Insurance which has unique topic it introduces two key concepts: Resilience & Reinvention.
Olatayo Babatolu, a director described Resilience as: “The power or ability of a material to return to its original form, position after being bent, compressed or stretched… that is elasticity” also described Reinvention as: “the action or process through which something is changed so much that it appears to be entirely new”.
He further said resilience results to ability to recover to the original state while reinvention results to scaling up to a Superior Level of Resilience (often quantum leap) after an event or in anticipation of an event.
Therefore, Resilience and Reinvention are intertwined, he added.
The Nigeria Deposit Insurance Corporation (NDIC) director cited that Globalization and disruptive technologies (digital disruption) are noted to elevate the opportunities and also threats to the traditional approaches to doing business generally hence the need to evolve pragmatic and dynamic Resilience and Reinvention strategies.
“While globalization is breaking barriers; disruptive technologies is allowing non-banking entities to provide banking services. Both with attendant Risk of Contagion.
“Both have implications for effectiveness of banking regulation, supervision and the mandates of a deposit insurer
“Other externalities like the novel COVID-19 pandemic have also posed significant risks to almost all sectors of the global economy.
According to him Banking system (both idiosyncratic and systemic) strive on Trust based on the confidence engenders in the banking public by the Safety Net Mechanism.
“Trust is fostered through effectiveness of: Prudential Supervision, The Lender of Last Resort and Deposit Insurance.
He said banking system is therefore, arguably, the most regulated business (enterprise) globally because of the financial intermediation roles of banks by which they mobilise deposits from the surplus units and lend to the deficit units, thereby facilitating economic growth and development, amongst other functions.
Besides being the most regulated, the banking industry is also, perhaps, the most disrupted industry, today, globally, he noted.
“As a critical element of the safety net arrangement, the Resilience and Reinvention Strategies of a Deposit Insurer could be considered from four Dimensions:
-Internal (Governance, Processes & enablers).
-Mandates.
-Soundness of the individual banks.
-Financial System Stability.
Babatolu said Deposit Insurance Scheme (DIS) is a financial guarantee to protect depositors in the event of bank failure and also to offer a measure of safety for the banking system.
“It is a scheme that is designed to protect particularly the small savers who may not be privileged to have adequate information on the financial condition of their banks.
NDIC Director highlights DIS benefits as follow:
-Protects depositors against full or partial loss of their savings.
-Reduces bank “runs” and contributes to financial stability.
-Can limit government fiscal exposure.
-Creates a formal mechanism for addressing bank failure
In his word: Generally, the policy objectives of a DIS are:
-To protect small depositors in the event of bank failure
-To contribute to financial system and macroeconomic stability
-To provide formal mechanism for failure resolution
-To contribute to orderly payment system mechanism
-To redistribute the cost of failure
-To promote competition amongst deposit-taking financial institutions
-To facilitate transitioning from blanket coverage to limited coverage
Babatolu pointed out that in the execution of its mandate as a key safety net initiative, the deposit insurer also has implicit social contract with the banking public.
“The general expectations by the banking public that the deposit insurer would protect their interests.
“Though those expectations may breed moral hazards but it is the reality.
As a key safety net initiative, he further stated that a DIS is, therefore, required to have robust resilience and reinvention strategies in place all the time but most especially during this period of extreme disruptions in the banking industry, globally.
He disclosed that there are two types of Deposit Insurance Scheme namely: Implicit and Explicit.
Implicit is a discretionary method used by authorities to prop up some failing deposit-taking financial institutions while Explicit is established by legislation or private contract which spell out its mandate, powers and governance structures.
The director reiterated that the enabling legislation states the objectives of the scheme and other operational guidelines relating to such issues as ownership, funding arrangement, extent of coverage and compensation limit, membership, rules and regulations guiding participation, supervisory and resolution powers among others
Variant of Explicit DIS:
PayBox:
-A deposit insurer with powers limited to paying out the claims of depositors
-It may collect premium if the system is contributory
-May also manage DIF
PayBoxPlus:
-In addition to the power of Paybox, they can set regulations
-They also have authority to undertake liquidation
Loss Minimiser:
-Has all the duties of Paybox Plus and much more resolution options.
-Determines resolution and receivership strategies as well as manages claims and optimizes recoveries.
-In most cases, do not have supervisory powers.
Risk Minimiser:
-A deposit insurer with powers to reduce the risk it faces
-It has the broadest roles, mandates and powers
He stressed that they may be authorized to resolve failures, monitor member institutions, carry out onsite inspection, provide financial assistance including open bank assistance with enforcement power.
Babatolu reaffirmed that the Nigeria Deposit Insurance Corporation (NDIC) is a risk minimizer with an Explicit mandate. According to him, the Corporation was created by NDIC Act No. 22 of 1988 (now repealed and replaced with NDIC Act 16 of 2006) and commenced operation in 1989 with the following core mandates:
-Deposit Guarantee
-Bank Supervision
-Distress Resolution and
-Bank Liquidation.
He said Insuring deposit liabilities of licensed bank and other such and deposit taking financial institutions;
Giving Assistance to insured institutions in the interest of depositors in case of imminent or actual financial difficulties particularly where suspension of payments is threatened to avoid damage to the public confidence in the banking system.
He noted that guaranteeing payments to depositors, in case of imminent or actual suspension of payments by insured institutions up to the maximum as provided for in section 20 of this Act;
Assisting monetary authorities in the formulation and implementation of policies so as to ensure sound banking practice and fair competition among insured institutions in the country; and
Pursuing any other measures necessary to achieve the functions of the Corporation provided such measures and actions are not repugnant to the objects of the Corporation.
NDIC’s Public Policy Objectives (PPOs)/Business Model
Insures Deposit Liabilities of Small Savers:
Only Deposit Liabilities are insured.
The Insured deposit is Capped at any given time.
Insurance Coverage is defined.
Compulsory scheme.
Babatolu said participation is limited to Deposit Money Banks (DMBs), Micro-Finance Banks (MFBs); Primary Mortgage Banks (PMBs); Subscribers of Mobile Money Operators. Also, Payment Service Banks (PSBs).
(ii) Protecting depositors by providing an orderly means of compensation in the event of failure of their insured financial institutions;
(iii) Distress Resolution: Deploying the most cost-effective tools (effectiveness could be macro- prudential impact).
(iv) Contributing to financial system stability by making incidence of bank runs less likely.
(iv) Liquidation: Orderly payment insured sums; payment liquidation dividends on pro-rata basis to uninsured deposit, creditors and shareholders of defunct insured bank (in that order).
(v) Consumer Protection.
“Prudential Supervision (Regulation) through three Departments: Bank Examination Department, Insurance & Surveillance Department and Special Insured Institutions Department.
While the Corporation’s PPOs have not changed over time; the scheme has evolved overtime consistent with the enabling law of the Corporation: (a) The Corporation’s has a dynamic business model (b)Successive enhancement to insured deposits.
He said disrupting and reshaping commerce are: Payment aggregators, Crowdfunding, Peer-to-lending, Algorithm lending.
He cited Crypto-currencies such as Bitcoin as where Fierce Competition From fintechs: Speed. Lean operations, little or no regulation, cost efficiency, critical mass, global reach, rising number of payment options at retailers, power to consumers, flexibility.
He said Technology enabled innovation in financial services yields benefits for economic growth and financial stability in the following ways:
-Diversification of the industry.
-Efficiency.
-Speed and convenience.
-Ease of access.
-Affordability.
-Variety of products.
-Financial Inclusion.
“It also has potential risks and unintended consequences:
– Financial Exclusion.
– Cybercrime.
– Money Laundering/Financing of Terrorism.
– Lack of Trust.
– No Uniform Standard.
– Complex Networks.
– Regulatory Arbitrage.
– Shadow banking.
The director noted that not only are technological disruptions and globalization re-defining insured banks’ business models, it is also accentuating:
-Contagious risks (globalization, interconnectedness, dependencies).
-Complexity of operations.
-Speed of transmission of stress and contagions.
-Cybersecurity risk.
“Operations of non-regulated financial institutions; NRFIs (including shadow banks).
“A major concern has been that Fintechs could displace traditional financial service industries
Babatolu said that a critical component of the financial safety-net arrangement, is a Deposit Insurance System (DIS) must be resilient in the ever changing and unpredictable financial environment and reinvent beyond the current crisis.
He said Resilience is the ability to deliver operations, including critical operations and core business lines, through a disruption from any hazard.
It is the ability of an organization to absorb and adapt in a changing environment to enable it to deliver its objectives and to survive and prosper, he added.
He pointed out that it is an outcome of effective operational risk management combined with sufficient financial and operational resources to prepare, adapt, withstand, and recover from disruptions.
“Expectations of the banking public (social contract) are:
-Speed of distress resolution.
-Payment of insured deposit.
-Resolution of consumer Complaints.
-Robustness of Prudential Supervision.
-Public accountability and engagements.
-Money laundering and terrorism financing.
