Global Banking Turmoil: Nigerian Banks Need Vigilance, Proactiveness – Agora Policy

The global banking turmoil over the last two weeks following a series of stunning bank collapses in Europe and the United States, has shown that Nigerian banks need to be more vigilant and guard against failures, a new report by Agora Policy, an Abuja-based think tank, has said

Despite a series of rescue packages for troubled lenders and the assurances of governments and financial regulators, concerns about the health of the global financial system persist in the aftermath of the March 10 collapse of Silicon Valley Bank (SVB). Financial experts said what happened to SVB is in a broad sense very similar to what is happening with Credit Suisse.

According to the report, the concerns in the global banking system are not limited to SVB and Credit Suisse as many investors are asking similar questions about many other banks. As a signal of these nerves, the Nasdaq bank index, an index which tracks the stock prices of some of the biggest banks, was down over 20% in the last month alone.

The report stated that on the domestic front, it is the time for Nigerian banks to be vigilant and guard against failures. ‘‘What does this mean in practice? Firstly, it could mean another round of stress tests to identify potential sources of stress to banks and other financial institutions, as well as measures to pre-emptively and tactfully deal with the risks, similar to what other central banks have done. With Credit Suisse for instance, central banks moved to force a quick sale to forestall any contagion and provided dollar liquidity to their financial systems to manage pressure. With SVB, guarantees were given that all depositors funds would be covered by insurance to minimize the risk of a bank run. The Central Bank of Nigeria (CBN) should be prepared to take such quick action if the need arises.

‘‘Secondly, it definitely means better and more transparent communication to calm nerves and ensure that sentiment does not turn against any bank. Banking is inherently a risky activity as you have to take bets on customers’ ability to repay loans and on businesses ability to generate a profit. Thirdly, as with every financial crisis, it could be an opportunity to update regulatory frameworks and re-examine which financial institutions need what type of regulations,’’ the report stated.

The Agora Policy report also believes this could be the time to take a closer look at the regulatory requirements for FinTechs or or other loan-granting institutions and will also mean avoiding policy actions that put unnecessary strain on banks.

The report said although the Nigerian banks have demonstrated that they learned from the banking crisis of 2008 with almost all banks being able to weather the multiple economic shocks that have hit the Nigerian economy, be it the 2015 oil price crash or the COVID-19 pandemic, there are however some risks that will still need to be assessed and closely monitored. The first of these, according to the report, relates to Nigerian banks direct exposure to foreign currency liabilities, that is foreign currency loans they have taken from other global financial institutions.

According to the report, ‘‘Since the crude oil crisis in 2014, foreign currency loans by banks have grown to be a significant portion of foreign exchange inflows. Foreign loans to the Nigerian economy has been at least $2bn a year since 2016, and up to $5bn in 2019 far outpacing foreign direct investment. As global interest rates rise, the costs of servicing these loans will no doubt increase.”

‘‘Anecdotal evidence suggests that most banks with foreign currency liabilities have taken measures to minimize that risk such as by getting into swap agreements with the Central Bank of Nigeria (CBN). Regardless, the risks should be taken note of. The second risk worth paying attention to relates to FinTechs. This has been a high-growth sector in Nigeria over the last decade and much of that growth has come in an era of globally cheap financing fuelled by venture capital. These FinTechs however tend to behave like their global counterparts and so should probably be watched in similar fashion.’’