CBN, Ndic – Controversies Over Bill [press release] (

Memorandum to the senate committee on banking, insurance and other financial institutions on the proposed bill for the repeal of the nigerian deposit insurance corporation act 2006 and the enactment of the nigeria deposit insurance corporation act, 2014.

Areas to be Highlighted:

1. NDIC is asking too much powers which they don’t require to carry out diligent job

2. There cannot be two captains in a ship

3. CBN wasn’t selfish to have thought it wise to request for the establishment of NDIC

4. The bulk of the older staff of NDIC were from CBN and had been working harmoniously together, what happens after those staff might have retired and issues of responsibility/authority arises in the nearest future, they may have to revert to the courts for adjudication – thereby exposing/ridiculing regulatory institutions.

Following the decision of the Nigeria Deposit Insurance Corporation (NDIC) to amend its 2006 Act, the CBN held various meetings to review the proposals to ensure consistency with the goals of financial system stability. The CBN drew the attention of the NDIC to several objectionable clauses in the proposed Act, which at the least sought to confer coordinate functions and powers on the NDIC. Specifically, the attention of the Corporation was drawn to the implications of the enactment of the Act as proposed as it would:

i. Make the NDIC a parallel/coordinate regulator for banks as CBN;

ii. Confer conflicting supervisory functions and powers on NDIC over banks; and

iii. Create overlapping regulatory responsibilities for the NDIC.

The powers that the Corporation sought to assume and exercise and the consequences thereof were analysed to include:

1. Power to Licence Banks: This was evidenced by the position of the NDIC that applicants for banking licences should simultaneously submit to the CBN and the NDIC, their applications for licences to enable the NDIC determine whether or not it will grant Deposit Insurance Status to the bank, if and when licensed. This position, which the Corporation claims to have dropped following our engagement with it, appears to still form the bedrock of some of its current proposals on the amendments and is the basis for some of the powers that it seeks to exercise. In this regard, it is the Corporation’s position that since it is not involved in the licensing of the banks but is compelled to insure them, it should be bestowed with the power to determine their deposit insurance status with a mere notification in writing to the CBN.

2. Power to Supervise Banks without Reference to the CBN: The NDIC’s position in this respect is evidenced by its written request to the CBN that banks in the financial system be equally shared between both organizations with each party able to exercise regulatory and supervisory powers over its “share” without reference to the other. It is in this regard that the Corporation proposed to examine banks and issue reports thereon without reference to the CBN. Also, the Corporation seeks to be able to remove board and management based on the report of its examinations on these banks. Furthermore, the Corporation has sought powers to carry out the consolidated supervision of banks subsidiaries, associates and affiliates without due regard for the sector regulators of such entities.

3. Power to Determine the Licences of Banks: The power sought by the NDIC in this regard is evidenced by the proposed amendment to its Act which will empower it to terminate the Deposit Insurance Status of a bank with a mere notification in writing to the CBN. There is no gainsaying that one of the effects of such an action alongside the consequential run on the bank, will be the technical and effective revocation of the bank’s licence, as deposit insurance coverage is a mandatory requirement for a licensed bank. This power, which is subsequent upon the occurrence of some events that are listed in the proposed Act, can be exercised by the Corporation on its own with a mere notification in writing to the CBN

4. Power to appoint itself as Liquidator: Subsequent to the power to determine the licence of a bank as detailed in (3) above, the Corporation also seeks the power to appoint itself as liquidator of the same institution. In other words, the NDIC, should its proposal receive a favorable consideration, would licence, supervise, insure and resolve a bank.

It is pertinent to mention that all the above powers, which the NDIC seeks to assume and exercise, are ostensibly to ensure that it carries out its function as a risk minimizer and that depositors of distressed banks and other deposit taking financial institutions are paid in good time to avoid delays. While the CBN supports the desire to pay depositors of distressed institutions in good time, the proposal to make NDIC “the judge and juror” in cases involving banks is fraught with dangers and is a recipe for financial instability. It is indeed the ingredient for chaos and anarchy and is not practiced in any financial system in the world. There is also the moral hazard of the NDIC as a deposit insurer that charges premium on the basis of the riskiness of an institution which it supervises without recourse to the CBN to rate such institutions as riskier than they actually are in order to enhance the premium charged to bolster the deposit insurance fund. Consequently, it is essential that the NDIC must flow from its primary function, which is the basis for its establishment, that is, Deposit Insurance. Then and only then, will its role in the financial system as it relates to banks and other deposit taking financial institutions be properly defined.

The founding fathers of the NDIC, inspired by practices in other jurisdictions, must have had this in mind in setting up the Corporation, as its responsibilities were aptly couched under Section 2 (1) of its enabling Act as follows:

“the Corporation shall have responsibility for-

(a) insuring all deposits liabilities of licensed banks and such other deposit taking financial institutions (hereinafter referred to as “insured institutions”) operating in Nigeria within the meaning of sections 16 and 20 of this Act so as to engender confidence in the Nigerian banking system.

(b) 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 public confidence in the banking system.

(c) guaranteeing payments to depositors, in case of imminent or actual suspension of payments by insured institutions up to the maximum amount as provided for in section 20 of this Act.

(d) assisting monetary authorities in the formulation and implementation of banking policy as to ensure sound banking practice and fair competition among insured institutions in the country, and

(e) pursuing any other measure necessary to achieve the functions of the Corporation provided such measures and actions are not repugnant to the objects of the Corporation.”

The above responsibilities, which should form the basis of the mandate of the Corporation, do not differ from those in other jurisdictions including Canada, Malaysia, and Japan. (Appendices 1 to 3). Consequently, the new powers that the Corporation seeks to assume and exercise are not only difficult to subsume under its responsibilities as detailed above, but are alien to deposit insurance practices in those jurisdictions. The NDIC is quick to cite two reasons for its proposal, which are:

i. The Core Principles for Effective Deposit Insurance issued by the International Association of Deposit Insurers (IADI) issued in June 2009; and

ii. The practice in the United States of America, where the Federal Deposit Insurance Corporation (FDIC), along with the Federal Reserve and the Office of the Comptroller of Currency regulates and supervises banks to ensure the safety and soundness of financial institutions, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions.

Regarding the Corporation’s assertions with regard to (i) above, it is pertinent to state that the IADI Core Principles for Effective Deposit Insurance Systems on which the Corporation relies for its propositions acknowledges the limitation of deposit insurance in ensuring financial stability. Specifically, item 5 under the core principles and preconditions states that, a deposit insurance system is not intended to deal, by itself, with systemically significant bank failures or a “systemic crisis”. In such cases all financial system safety-net participants must work together effectively”. Furthermore, Core Principle 1, states that, “… the principal objectives for deposit insurance systems are to contributeto the stability of the financial system and protect depositors”. This principle makes no reference to supervision and does not advocate a take-over of the supervisory function as is being canvassed by the NDIC. The IADI Core Principle 2 on mitigating moral hazard, expatiating on the role of the deposit insurer, states that, “… the deposit insurance system contains appropriate design features and through other elements of the financial system safety net”. Also, Item 4, under the core principles and preconditions states that, “the introduction or the reform of a deposit insurance system can be more successful when a country’s banking system is healthy and its institutional environment is sound. In order to be credible, and to avoid distortions that may result in moral hazard, a deposit insurance system needs to be partof a well-constructed financial system safety net, properly designed and well implemented. A financial safety net usually includes prudential regulation and supervision, a lender of last resort and deposit insurance. The distribution of powers and responsibilities between the financial safety-net participants is a matter of public policy choice and individual country circumstances”. It is therefore obvious that the Core Principles, on which the Corporation seeks to place reliance, agree that, there should, and must be, other players in the system with their own distinct and unique roles all geared toward a common purpose. This assertion is further buoyed by item 7 under the Core Principles and Preconditions of the IADI Core Principles, which states that, “an effective deposit insurance system needs to be based on a number of external elements or preconditions. These preconditions, although mostly outside the direct jurisdiction of the deposit insurance system, have a direct impact on the system… “

In any case, the core principles must be read in conjunction with the Basel Core Principles for Effective Banking Supervision (BCPs), which are not only superior on issues of banking supervision, but wider in acceptability and application and earlier in time-thus time tested. Core Principle 1 on the Responsibilities, Objectives and Powers of Banking Supervision is very instructive in this regard. This principle states that, “An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups. A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks,conduct ongoing supervision,address compliance with laws and undertake timely corrective actions to address safety and soundness concerns”. It is obvious from this that the Committee contemplated that the authorizing body should conduct supervision. It is thus our considered opinion that, it would be myopic to base the desire to exercise coordinate supervisory powers with the CBN on the basis of the IADI principle. This is more so as the above principles are to be applied taking into cognizance the fact that the distribution of powers and responsibilities between the financial safety-net participants is a matter of public policy choice and individual country circumstances.

Second, on the role of the FDIC in the USA, while we agree that the Federal Reserve shares supervisory and regulatory responsibilities for domestic banking institutions with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) at the federal level, and with the banking departments of the various states, the primary supervisor of a domestic banking institution is generally determined by the type of institution that it is and the governmental authority that granted it permission to commence business (commonly referred to as a charter). Banks that are chartered by a state government are referred to as State banks, while banks that are chartered by the OCC, which is a bureau of the Department of the Treasury, are referred to as National banks.The Federal Reserve has primary supervisory authority for state banks that elect to become members of the Federal Reserve System (State member banks). State banks that are not members of the Federal Reserve System (State nonmember banks) are supervised by the FDIC. In addition to being supervised by the Federal Reserve or FDIC, all State banks are supervised by their chartering State. The OCC supervises national banks. All national banks must become members of the Federal Reserve System. The FDIC, which insures the deposits of banks and savings associations up to certain limits established by law and as the insurer, has special examination authority to determine the condition of an insured bank or savings association, for insurance purpose.

It is imperative to emphasize that the FDIC, although an independent federal agency like the Federal Reserve, is managed by five directors, one of whom is the Comptroller of the Currency. The other directors are the director of the Office of Thrift Supervision and three others appointed by the President for a term of six years. One of the appointed members is designated by the President as chairman of the FDIC for a five-year term. (Appendix 4) In other words, the FDIC in the United States is managed by the heads of the other supervisory agencies-OCC and OTS- and three other directors. It is therefore inappropriate to compare the US financial system architecture with the Nigerian financial system architecture as the NDIC has an executive management that is independent of other regulatory agencies.

It is also important to note that, the USA banking system can hardly be used as an example of best practice as the dual federal-state banking system evolved partly out of the complexity of the U.S. Financial system, with its many kinds of depository institutions and numerous chartering authorities. It has also resulted from a wide variety of federal and state laws and regulations designed to remedy problems that the U.S. commercial banking system has faced over its history. The US financial system is therefore unique and not replicated anywhere in the world; hence our concern at the constant reference to the system as “best practice” by the NDIC. Certainly, a country from where the global financial crisis started cannot be cited as an example for the rest of the world to follow.

We had at several instances conveyed the above position to the NDIC at several fora. Specifically, during meetings held with the Corporation on February 28, 2013 and June 13, 2014. Our position was also conveyed at the legislative summit for the proposed amendment held for the Senate Committee on Banking and Financeat the Nicon Luxury Hotel, Abuja, on May 5, 2014. The Committee, at the close of the summit requested the CBN and the NDIC to meet and resolve all the areas that were contentious in the proposed bill. Also,at the Legislative Summit on the proposed amendment for the House Committee on Banking and Currency held on June 4, 2014 at the Transcorp Hilton, Abuja, the CBN noted that the contentious issues had not been resolved as there had been no communication between the CBN and the NDIC on resolution of theobjectionable clauses. The Chairman of the session, however, advised that, as some of the objectionable areas were already in the 2006 NDIC Act, in accordance with the House Legislative Rules, they could only be changed through a Memorandum brought before the House at the Public Hearing of the Bill.

Specifically the areas that we consider particularly objectionable that are unresolved are:

1. Section 3 Mandate of the NDIC

The NDIC seeks to appropriate as part of its mandate, the supervision of Financial Institutions in Nigeria along with its primary responsibility of providing Deposit Insurance.Our concern on the need for the mandate of the Corporation to be specific in relation to its functions and the reason for which it was established is yet to be addressed. The mandate of the NDIC in the draft bill includes, “the effective supervision of Insured Institutions to reduce the risk of failure and ensure that unsafe and unsound practices are minimized”.

2. Section 7 (2) Composition of the Board of Directors of the NDIC

The NDIC seeks to replace the Director of Banking Supervision with the Deputy Governor and the Director of Home Finance with the Permanent Secretary of the Ministry of Finance on the Board of the NDIC citing its expanded responsibility as basis.

This position is also repeated under Section 9(4)(C) on the composition of Interim Management Board.

3. Sections 28 and 29 Grievous Violation of Obligations

Section 28(1) & (2), contains a list of the conditions and practices by an insured institution that are considered grievous violations for which the Corporation may terminate its insured status (after considering & applying corrective measures) without reference to the CBN.

Section 29(1) states the conditions for the termination of an institution’s insured status with Section 29(2) requiring the Corporation to only “inform the Central Bank of Nigeria accordingly” after the termination of insured status.

The NDIC by this proposed provision arrogated to itself the power to withdraw the Deposit Insured Status of any Financial Institution under certain circumstances, a position that is inconsistent with the statutory requirement for providing insurance. These circumstances, which are listed to include persistent illiquidity, persistent contravention of the provisions of any legislation relating to banking, economic and financial crimes and making of incomplete or incorrect statements to the Corporation, among others, is an action, that once taken, is tantamount to the “technical” revocation of the bank’s licence without recourse to the CBN. This is so because deposit insurance, which is only offered by the NDIC, is a necessary and subsisting condition for all banks.

4. Section 32 (5), (6) and (7) Supervision of Related Entities of Insured Institutions (Consolidated Supervision)

The draft bill under Section 32(5) empowers the Corporation to directly obtain information from the subsidiaries or affiliates or associated companies of an insured institution. Also, Section 32(6) and 32(7) further accentuates the power of the Corporation over these institutions including the holding companies without regard for the specific sector supervisors of the Financial Services Regulation Coordinating Committee.

Unrestricted or uncoordinated actions by individual supervisory agencies could lead to chaos in the financial system. Requests to related entities must be within the cooperative framework that is in place and with complete participation of the relevant regulator/supervisor of the sector in which the related entity operates.

The powers being sought by the Corporation is to conduct consolidated supervision, across all sectors of the financial system by granting itself the power to examine institutions in those sectors without recourse to the primary regulator of the sector e.g. investigation of capital market institutions without recourse to the Securities and Exchange Commission.

5. Sections 33, 34,35,36 & 37 Powers of Examination and Prompt Corrective Action

The provisions of these sections grant the Corporation the power to conduct both Routine and Special Examinations by order of the Management of the NDIC. The duplication of powers of examination as well as any potential Corrective Actions derived from the examination reports do not enhance Financial System Stability. The powers of examination by the NDIC should focus on Deposit Insurance in consonance with its functions and objectives.

These powers are currently constituted are a duplication of the powers given the Governor of the CBN in the Banks and Other Financial Institutions Act.

6. Section 46 Control of Insured Institution

Section 46(1) empowers the Corporation to take control of insured institutions in consultation with the CBN. However, there is a need to clarify whether this position also applies to Section 46(2).

7. Section 49 – Appointment as Liquidator

Section 49(1) empowers the Corporation to appoint itself as Liquidator upon the revocation of licence by the CBN while Section 49(3)(i)(ii) seeks to impose an obligation on the CBN to revoke a banking licence on the basis of the Corporation’s actions.

Also, the proposed Act under section 49(3)(iii) seeks to empower the CBN to carry out prompt corrective Action! This should be in the CBN Act not NDIC Act.

This is also applicable to Section 49(4)(a) & (b).

8. Section 49(7)(d) – Issuance of Freezing Orders

Section 49(7)(d) seeks to tacitly bestow on the Corporation, the power to issue freezing orders on customers’ accounts without reference to any party! Also the Corporation may suspend on its own, any director or officer who fails to comply with such Notice of freezing of account.

9. Section 49 (8) (viii) Supervision of the Corporation

Section 49 (8) (viii) seeks to confer absolute powers on the Corporation as it states that “No organ, office, Ministry, Department or Agency of Government shall exercise jurisdiction or any supervisory power over the Corporation”.

10. Section 57(1) – Annual Accounts

Further to the provisions of Section 49(8)(viii) on the supervision of the Corporation, this section also states that it is not accountable to any person in the preparation and submission of its financial statements, except for its Board. Even the CBN reports to the National Assembly.

Public Hearing on the Proposed Amendment (House of Representatives)

The CBN was invited to the public hearing on the proposed amendment held at the premises of the NASS on July 08, 2014 where it also raised its objections to the above provisions in the interest of financial stability.

Permit me to humbly invitethe Senate Committee on Banking, Insurance and Other Financial Institutions to note that the amendments being sought by the NDIC are the very ingredient for chaos and anarchy, and will threaten the fabric of our financial stability, which, ironically, the Corporation claims, it is seeking to ensure. Rather, in the interest of financial stability, we propose that this opportunity be used to review the Corporation’s enabling Act to focus it on its essence, which is deposit insurance, in line with best practices.

We submit the above for the consideration of the Senate Committee on Banking, Insurance and Other Financial Institutions, please.