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Purpose driven-banking model: ... and Promotion of economic growth and development. * * Concept of Financial Stability (Cont d) International Monetary Fund ... – PowerPoint PPT presentation

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  • Presented by
  • Being a Paper Presented at the
  • NOVEMBER 2012

  • Introduction
  • The concept of financial system stability
  • Financial system stability mandates of Central
  • Tools of financial system stability
  • Challenges to maintaining financial system
  • Efforts of the Central Bank of Nigeria at
    Ensuring Financial Stability
  • Conclusion.

  • The recent crises (2007-8) that affected the
    global financial system and most economies,
    including those of African countries, brought to
    the fore the need for central banks, particularly
    those of Africa to broaden their mandates of
    ensuring financial stability.
  • African economies were initially believed to be
    insulated from the global financial crisis in
    view of their relatively low level of integration
    with global financial markets.

Introduction (contd)
  • However, the benefit of hindsight from the crisis
    indicated that this belief was erroneous.
  • Nigeria, for instance, witnessed
  • a major decline in oil revenue as the
    international prices of crude plummeted from
    about US140 to about US40.
  • huge divestment from the capital market by
    foreign portfolio investors thus depressing
    stock prices.

Introduction (Contd)
  • The Nigerian Banking industry was heavily exposed
    to the capital market through margin loans and
    to the oil and gas through loans, which
    performance were affected by the global financial

Introduction (Contd)
  • The financial system is the engine of economic
    development and financial regulators world seek
    to design and implement policies that aim at
    preventing crisis in the sector, and where they
    occur to minimize their impact and ensure early
    and orderly resolution.
  • In Nigeria, the Central Bank of Nigeria (CBN) is
    the agency with responsibilities to ensure
    monetary and price stability and promote a stable
    and sound financial system.
  • These roles complement each other as price
    stability cannot be achieved in an environment of
    unstable financial system.

The Concept of Financial Stability
  • Financial system stability is a concept that
    seems to defy consensus definition.
  • It is the resilience of the financial system to
    shocks that may arise from time to time.
  • Financial system stability is not an end point
    but a process and therefore, the mechanism for
    establishing the stability of the system is
  • It also refers to the resilience of a financial
    system against major vulnerabilities.

Concept of Financial Stability (Contd)
  • - It should ensure the smooth functioning of the
    financial intermediation process coupled with
    confidence in the operations of key financial
    institutions and markets within the economy.

Concept of Financial Stability (Contd)
  • Essential features of financial stability in
  • Resilience of the financial system to
    unanticipated shocks
  • Effective functioning of the financial system
    intermediation process
  • Efficient allocation of financial resources
    facilitated by the flow of funds between savers
    and borrowers
  • Improvement in the general economic welfare and
    living standard of the people
  • Confidence in each of the sectors that
    constitutes the financial and market systems of
    an economy and
  • Promotion of economic growth and development.

Concept of Financial Stability (Contd)
  • International Monetary Fund (IMF, 2004) describes
    financial stability as a system that is not only
    able to support the performance of an economy but
    also, able to absorb financial imbalances
    resulting from unfavorable developments.
  • Financial system stability is assumed where
    there is confidence in the operation of key
    financial institutions and markets within the
    economy, thus allowing for a smooth
    intermediation process.
  • A stable financial system supports the efficient
    allocation of resources and effective risk
    distribution across the economy.

Concept of Financial Stability (Contd)
  • Financial stability requires proper coordination
    between fiscal and monetary authorities to avoid
    working at cross-purposes and to achieve the
    desired level of financial stability.
  • Coordination of decisions at the various stages
    of economic planning ensures that issues that are
    significant to the stability of the financial
    system are identified and addressed to stave-off

Central Banks and Financial Stability
  • The primary roles of central banks include
  • Issuance of legal tender
  • Lender of last resort
  • Banker to the government
  • Serving as bankers bank
  • Promotion of a sound and stable financial system
  • Ensuring monetary and price stability and
  • Maintaining external stability.

Central Banks and Financial Stability (contd)
  • These mandates aim at stabilizing the financial
  • In developing economies like Africas, however,
    such mandates may include, the implementation of
    programmes aimed at stimulating economic

Central Banks and Financial Stability (contd)
  • In 2011, a study group commissioned by the Basel
    Committee on Banking Supervision (BCBS) carried
    out research on central bank governance and
    financial stability and released a report in May
    2011, with the following conclusions
  • That central banks shall be involved in the
    formulation and execution of financial stability
    policy to achieve effectiveness
  • That central banks financial stability mandates
    and governance arrangements shall be compatible
    with their monetary policy responsibilities

Central Banks and Financial Stability (contd)
  • That, besides charging central banks with the
    responsibility of financial system stability, it
    is appropriate to complement such
    responsibilities with necessary tools,
    authorities and safeguards for effectiveness and
  • That role clarity and the responsibilities of the
    authorities involved in financial system
    stability policies (central banks, supervisors,
    deposit insurers, treasuries and competition
    authorities) are essential for proactive
    decision-making and accountability.

Central Banks and Financial Stability (contd)
  • According to the report, there are three key
    reasons why central banks should play prominent
    roles in financial system stability
  • Financial system instability can affect the
    macro-economic environment, with serious
    consequences on economic activity, price
    stability and monetary policy transmission
  • Central banks are the ultimate sources of
    liquidity in the economy, which is a major
    instrument of financial system stability and
  • The monetary policy functions afford them the
    opportunity of understanding market dynamics
    relative to macro-prudential role.

Central Banks and Financial Stability (contd)
  • The report underscores the importance of
    financial system stability and canvassed for an
    explicit authorization in the enabling Act of
    Central Banks with respect to transparency and
  • In Nigeria, the Central Bank of Nigeria had to
    carry out quantitative easing in 2009 by
    creating schemes for credit to reinvigorate the
    sectors which are critical to the development of
    the economy, including special funds for
    agriculture, manufacturing, aviation as well as
    small and medium business sub-sector.

Central Banks and Financial Stability (contd)
  • In many jurisdictions, there is no clear
    consensus among policy makers as to who should
    anchor oversight over banks and the metrics of
    such oversight. In most countries of the world
    however, the responsibility is ceded to the
    central banks in view of the important role they
    play in the economy.
  • The general mandates of Central Banks with
    regards to Financial System Stability mainly
    consist of
  • The promotion of a sound and stable financial
    system through effective regulation and
    supervision of the banking system
  • Ensuring monetary and price stability through the
    implementation of appropriate monetary policy
  • Maintaining external stability by striving to
    achieve relative stability in its exchange rate

Central Banks and Financial Stability (contd)
  • In Nigeria, the CBN derives its mandate from the
    CBN Act of 2007 and the Banks and Other Financial
    Institutions Act of 1991, as amended to date.
  • These Acts empower it to independently design and
    implement regulatory frameworks to, among others,
    promote a sound financial system. Pursuant to
    these powers, the Bank, in the last three years,
    sustained the reforms that were started in 2004.

Central Banks and Financial Stability (contd)
  • The Act also empowers the CBN to
  • Ensure monetary and price stability
  • Issue leger tender currency in Nigeria
  • Maintain external reserve to safeguard the
    international value of the legal tender currency
  • Promote a sound financial system in Nigeria and
  • Act as banker and provide economic and financial
    advice to the Federal Government.

Central Banks and Financial Stability (contd)
  • In the effort to ensure the effectiveness of its
    Monetary Policy function, the CBN has put in
    place a Monetary Policy architecture which
  • The Monetary Policy Committee (MPC) whose
    composition and mandates are expressly stipulated
    in the CBN Act, 2007
  • A Monetary Policy Department (MPD) within the
  • Monetary Policy Implementation Committee (MPIC)
  • Liquidity Assessment Group (LAG).

Central Banks and Financial Stability (contd)
  • As part of the efforts to address vulnerabilities
    in the banking system, the CBN went through a
    process of internal restructuring by changing the
    erstwhile financial sector surveillance
    directorate to financial system stability
  • It also created three new departments in an
    effort to strengthen the CBNs regulatory and
    oversight capabilities
  • Financial Policy Regulation Department(FPRD)
  • Risk Management Department(RMD) and
  • Financial Markets Department (FMD).

Central Banks and Financial Stability (contd)
  • The FPRD acts as a policy research shop and
    think-tank team for financial system stability.
  • It has the responsibility for policy formulation,
    analysis, review and impact assessment
    macro-prudential analysis AML/CFT policies and
    licensing of financial institutions.
  • It also provides a Secretariat for the Financial
    Services Regulation Coordinating Committee a
    statutory body established to promote
    inter-agency cooperation among regulators of the
    financial services industry.

Central Banks and Financial Stability (contd)
  • The RMD develops frameworks for the
    identification, management and control of risks
    to the achievement of the Banks statutory
  • FMD evaluates market dynamics and develops
    initiatives that deepen the resilience of the
    domestic money market, especially as the bond
    market grows.

Central Banks and Financial Stability (contd)
  • Earlier in 2012, the Consumer Protection
    Department, was created from the FPRD to enhance
    public confidence in the banking system.
  • Its mandates include
  • consumer education
  • promotion of financial literacy and
  • the resolution of bank-customer relationship

Central Banks and Financial Stability (contd)
  • The Assets Management Corporation of Nigeria
    (AMCON) was established in 2010 to relieve banks
    of the burden of Non-performing Loans (NPLs).
  • It has impacted the industry in the following
  • The acquisition of delinquent assets by AMCON
    helped to clean the balance sheet of banks and
    improved asset quality in the industry from the
    high rate of 34.44 to below 5.0 currently.
  • It helped improve liquidity in the banking system
    by providing much-needed cash for the delinquent
  • It has helped to put Nigerian banks among the
    safest in the world.

Central Banks and Financial Stability (contd)
  • In Nigeria, other regulatory agencies share the
    responsibility for the stability of the financial
    system with the CBN.
  • These include
  • The Securities and Exchange Commission (SEC),
  • Nigerian Deposit Insurance Corporation (NDIC),
  • National Insurance Commission (NAICOM),
  • National Pension Commission (PENCOM),
  • Corporate Affairs Commission (CAC) and
  • Self-regulatory bodies, e.g Chartered Institute
    of Bankers of Nigeria (CIBN).

Tools Used in Entrenching Financial System
  • The following are some of the tools used in
    Nigeria to ensure financial system stability
  • Banking Supervision and Regulation
  • Effective and efficient supervision and
    regulation of banks is imperative for financial
    system stability because of the leading role
    played by banks in most economies.
  • The tools used by the CBN in the supervision of
    banks and OFIs include on-site examination
    off-site supervision and issuance of financial

Tools Used in Entrenching Financial System
Stability (contd)
  • The CBN has signed home-host MoUs with nine
    jurisdictions where Nigerian banks are operating.
  • The purpose of the MoUs is to facilitate
    information sharing which will enhance the
    assessment of the cross-border risks inherent in
    the operations of the institutions and help
    prevent contagion.

Tools Used in Entrenching Financial System
Stability (contd)
  • Macro-prudential Surveillance and Regulation
  • Macro-prudential regulation involves evaluating
    the financial system as a whole to identify
    weaknesses and threats and develop appropriate
    remedial interventions.
  • Through research, collaboration with other
    agencies in the financial sector, central banks
    have information that allows them to monitor
    trends in financial markets.
  • Macro-prudential tools such as stress testing,
    Early Warning Signs (EWS), trend analysis, etc
    are used to analyze the information for early
    detection and resolution of potential threats to
    financial system stability.

Tools Used in Entrenching Financial System
Stability (contd)
  • Monetary and Price Stability
  • The objectives of monetary policy may vary from
    country to country.
  • Monetary policy broadly seeks to achieve price
    stability and other macroeconomic objectives.
  • Central banks with no authority for banking
    supervision and regulation influence the
    stability of the financial system through the
    monetary and price stability mandates.

Tools Used in Entrenching Financial System
Stability (contd)
  • Other Tools and Policies
  • The Central Banks of developing economies play
    developmental roles to provide an improved
    macro-environment in which their policies can be
    more effective.

Challenges to Maintaining Financial System
  • Some challenges to maintaining financial
    stability include
  • Poor corporate governance
  • Major weaknesses in the business environment
  • Large capital flows to emerging economies
  • Weak micro-prudential supervision framework
  • Weak legal provisions/enforcement
  • New and complex financial instruments
  • Weak macro-prudential analysis framework

Efforts of the CBN at Ensuring Financial
  • The CBN, in 2008, took several steps to stem
    decline in the financial system. These steps are
    discussed below
  • Sustenance of reforms
  • Central banks generally access information on the
    threat to financial stability through their
    research and surveillance functions. The
    information provides the basis for various
    interventions and policy initiatives as the need
    arises, to strengthen financial system stability.

Efforts of the CBN at Ensuring Financial
Stability (Contd)
  • The Banks latest set of reforms, which commenced
    in 2009, includes
  • internal restructuring within the CBN itself
  • enhancing the quality of banks
  • establishing financial stability
  • enabling healthy financial sector evolution and
  • ensuring that the financial sector contributes to
    the real economy.

Efforts of the CBN at Ensuring Financial
Stability (Contd)
  • Enhancing the quality of the banks - This entails
    the various industry remedial programmes targeted
    at enhancing the operations and quality of banks
    in Nigeria. These programmes include
  • implementation of Risk-Based Supervision (RBS)
  • adoption of the International Financial Reporting
    Standards (IFRS) in the Nigerian Banking Sector
    by end 2012
  • close collaboration with other stakeholders etc
  • establishment of a consumer protection
  • capacity building on RBS methodology in the CBN
    and NDIC and
  • promoting good corporate governance.

Efforts of the CBN at Ensuring Financial
Stability (Contd)
  • Establishing Financial Stability - The primary
    focus of this pillar is to
  • strengthen the financial stability committee in
    the CBN
  • establish hybrid monetary policy and
    macro-prudential rules
  • develop directional economic policy as well as
    counter-cyclical fiscal policies by the
    government and
  • further develop the capital markets as an
    alternative to bank funding.

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • Enabling Healthy financial Sector evolution -
    The focus of this pillar of the reform is to
  • the emergence of a competitive banking industry
  • provision of the required supportive institutions
    for the financial system such as the credit
  • improvement in the cost structure for banks
    through cost control and business process
  • reliable and secure payments system
  • reduction of the informal sector and greater
    financial inclusion.
  • Foreign bank participation would be encouraged in
    order to improve and strengthen the financial
    system provided

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • Ensuring that the Financial System contributes to
    the Real Economy
  • In addition to the reforms in the banking sector,
    the CBN has focused on facilitating economic
    development in Nigeria through its developmental
  • In this regard, the CBN has taken the lead in the
    financing of the real sector and infrastructure
    projects as well as enhancing credit to the real

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • b) Use of market-driven monetary policy tools
  • Central banks use quantitative and qualitative
    tools to achieve price stability.
  • In Nigeria, the CBN uses more of qualitative
    tools, including open market operations to
    influence the direction of monetary policy.
  • The policy thrust has always hinged on the need
    to influence the cost and availability of credit
    to the critical sectors of the economy.

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • c) Provision of safety nets through lender of
    last resort Lender of last resort is one of the
    traditional safety net functions used by central
    banks in addressing financial instability and
    crisis management.
  • It involves both the provision of liquidity in
    normal times as well as during crisis periods.
  • This tool has primarily focused on banks and is
    justified by the vulnerability of banks to
    liquidity crises that often trigger systemic
  • A major milestone was achieved by the Central
    Bank of Nigeria in the effort to promote
    stability with the establishment of the Assets
    Management Corporation of Nigeria (AMCON) which
    relieved banks of the yoke of their delinquent
    assets and injected liquidity into the banking

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • d) Promoting financial stability through an
    effective payment system
  • The payments system, being the channel through
    which financial resources flows within as well as
    in and out of the economy, plays a very crucial
    role in promoting financial stability.
  • It, therefore, represents the major foundation of
    the modern market economy.
  • Central Banks, through the effective deployment
    of its statutory powers of oversight over the
    payment system is able to prevent and or manage
    risks related to the disruption of the payment
    system due to failing participants.
  • Credit balances across banks in a netting system
    can trigger contagion risks. Central banks
    develop mechanisms and arrangement to limit the
    potential increase of these risks in the payment

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • e. Adoption of good governance principles
    Central banks play a vital role in fostering the
    soundness of financial institutions through
    effective supervision and regulation.
  • Since banks in many economies constitute the
    dominant share in the financial sector, their
    failure could trigger financial instability and
    disrupt the effective functioning of an economy.
  • To promote sound corporate governance in the
    banking system, the CBN issued a code of
    corporate governance, the adoption of which has
    been made mandatory for banks in the country. The
    code which was first issued in 2006 is currently
    being reviewed to strengthen it and bring it in
    line with international best practices. To
    complete the code, Guidelines for whistle-blowing
    in the banking industry are, also being developed
    to provide avenues for the reporting of
    wrong-doing in the industry

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • f. Purpose driven-banking model
  • The CBN, on realizing that the practice of
    Universal Banking Model in its jurisdiction
    resulted in the expansion of banks operations
    into a broad range of financial services, for
    which they lacked the requisite skills, and thus
    exposed them to higher risks, increased their
    propensity to apply depositors funds to risky
    non-banking businesses, and consequently heighten
    the risk of financial system instability, decided
    to abolish it.
  • The CBN consequently introduced a new banking
    model, which is designed to ring-fence banks
    against the negative impact of non-banking
    activities, and thus to enhance stability in the
    Nigerian financial system.

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • g. New Prudential Guidelines
  • The Prudential Guidelines issued to the industry
    in 1990 had become obsolete. The CBN therefore
    issued Revised Prudential Guidelines in July

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • The objectives of the new Prudential Guidelines
    which are designed to enhance the financial
    health of banks and thus financial system
    stability include the following
  • enhanced provisioning requirements, which are
    consistent with sound risk management practices
    for Nigerian banks
  • provisioning requirements which are aligned with
    the life cycle and gestation periods of specific
    industry loan types
  • provide a framework to ensure that provisioning
    guidelines are counter cyclical (pro-dynamic)
  • provide a framework that recognizes credit risk
    deceleration and mitigation through haircuts
    adjustment for lost facilities.

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • Also in 2010, the CBN Guidelines for Supervisory
    Intervention in Banks was issued to establish
    triggers for regulatory intervention when
    prudential ratios and other thresholds fall out
    of the comfort zone.
  • The guidelines provide general and specific
    thresholds for regulatory interventions in banks
    in respect of the specified prudential
  • It also provides the regulators with benchmarks
    for a global concern regarding the safety and
    soundness of the banking system.

Efforts of the CBN towards Ensuring Financial
Stability (Contd)
  • h. Others Other reform measures aimed at
    promoting financial stability include
  • enforcement of a common year-end for banks
    implementation of risk-based supervision
  • review of the Microfinance and Bureaux de change
  • review of criteria for top management
    appointments in banks and other financial
    institutions and
  • the implementation of cross-border joint
    examination of banks.

  • Ladies and gentlemen, the financial system is a
    platform for the allocation of financial
    resources to the productive sectors of the
    economy and in view of its strategic importance,
    the Central Bank of Nigeria consider the
    involvement of all the supervisors in the
    financial system, including self-regulatory
    agencies like the Bankers Institutes quite
    helpful in ensuring effective supervision of
    financial institutions.
  • We therefore, commend The Egyptian Banking
    Institutes for providing this platform for us to
    share experiences. The opportunities provided by
    this conference for African Central Banks and
    other financial sector regulators/supervisors
    will go a long way in drawing attention to issues
    of financial instability across the continent as
    well as the need to evolve measures for
    addressing them. It is by so doing that economic
    growth and development can be sustained in the

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