MONEY MARKET: SVB Collapse And Nigeria’s Banking System Stability

T he financial sector of the United States of America (USA) was, at the weekend, thrown into a frenzy after the collapse of the 16th largest bank in the country. This is the first bank to collapse since the 2008 global financial crisis, making it the second biggest bank failure in the western country.

The collapse of the Silicon Valley Bank (SVB) which caters to the US tech world and venture capitalists, reverberated around financial institutions across the US and in Europe, raising questions on regulations in the banking industry.

Customers and investors of the bank had, on Friday, March 10, 2023, begun pulling their funds out of the bank, as the US Federal Deposit Insurance Corporation (FDIC) which insures bank deposits and oversees financial institutions, said all insured depositors will have full access to their insured deposits by no later than Monday morning. It said, it would pay uninsured depositors an “advance dividend within the next week.”

The jitters stemmed from SBV’s announcement of $1.8 billion loss on the sale of a portfolio of securities and sought to raise a further $2.25 billion from capital markets, to shore up its balance sheet but its shares cratered.

Back home in Nigeria, the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporations (NDIC), which oversee the financial sector, has over time put in place measures to ensure that the banking industry remains safe and stable, as they regularly conduct stress test and oversight that safeguard customers deposit and confidence.

A stable financial system is one in which financial intermediaries, markets and market infrastructure facilitate the smooth flow of funds between savers and investors and, by doing so, help promote growth in economic activity. The safeguarding of financial stability is a forward-looking task that seeks to identify vulnerabilities within the financial system and, where possible, take mitigating action.

Financial system instability is detrimental to the economy and is caused by multiple factors with complex dynamics such as, global imbalances, market liberalisation, under regulation/supervision, poor macroeconomic policies, poor corporate governance, insufficient transparency, moral hazards and irrational exuberance.

Other factors include, liquidity mismatch, non-performing loans, fall in asset prices, equity markets, detrimental exchange rate regimes, complex risks, such as credit risk, interest rate risk, exchange rate risk and contagion, and information asymmetries. The power of information in driving growth in the financial system is immense.

While financial system stability is one of the core mandates of central banks around the world, regulatory agencies around the world became more strategically sensitive in the aftermath of the 2008-2009 global financial crisis.

The 2008-2009 global financial crisis resulted in the loss of 8.7million jobs, foreclosure of 15 million homes, collapse of some giant financial institutions hitherto considered too big to fail, and wiped out $2.8trillion savings in the United States of America alone and the effect was almost just as the same in every part of the world.

Deputy governor, Economic Policy, CBN, Kingsley Obiora had affirmed the stability of the Nigerian banking industry as he said, the banking system remains sound, safe, and resilient. According to him, industry Non-performing Loans (NLs) had decreased from 4.9 per cent in December 2021 to 4.2 per cent in December 2022, which was below the maximum prudential requirement of 5.0 per cent.

“The decline in NPLs was attributable to write-offs, restructuring of facilities, Global Standing Instruction (GSI) and sound credit risk management by banks. Total assets of the banking industry grew by N14.36 trillion or 24.24 per cent from N59.24 trillion in December 2021 to N73.59 trillion in December 2022, driven by balances with CBN/banks, investments, and credit expansion to the real sector.

“As a result, total gross credit increased by N5.14 trillion or 20.93 per cent between the end of December 2021 and December 2022, from N24.57 trillion to N29.72 trillion, due to the increase in the industry funding base as well as the CBN’s directive on LDR, which has encouraged banks to increase lending to the real sector of the economy, and business strategy and competition. The increase in credit to the key sectors of the economy is expected to bolster aggregate demand and promote economic growth, job creation, and poverty alleviation,” he stated.

On her part, deputy governor, Financial System Stability at the CBN, Aisha Ahmad, said: “The financial system has provided significant support for needed domestic economic resilience amidst global shocks and remained strong into 2023.

“Data provided by Bank staff indicated stability in broad soundness indicators and an unprecedented improvement in asset quality, even as credit to the private sector continued to grow.

“Capital adequacy as of December 2022 was robust at 13.83 per cent, 383 basis points above the regulatory minimum of 10 per cent. Industry liquidity was also strong at 44.10 per cent over the same period and supported by significant cash reserve requirement buffers available to provide liquidity backstops, should banks require it.”