GTA-AP6 Okpalaobieri.pdf - Global Trade Alert

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Confidence building:• Assurances about the state of the banks and that government /CBN would not allow anybank tofail• Advice to banks to ensure greater disclosure to the public• Bankers’ Committee increasing emphasiss on maintaining high ethical standards in the operationsof banks: using service delivery as key instrument of competition.Outcomes so far and prospectsThe following were the direct outcomes and prospectss of the response from the government andthe Central Bank ofNigeria aimed at mitigating the impact of thee financial crisis on the Nigerianbanking sector.• GDP growth rateincreased from 6.2% in 2007 to an estimated 6.8% in 2008 the National Bureauof Statistics (NBS) despite the global crisis (with non‐oil growth at 9.5%, while the oil sectordeclined by 4.5% %)• End period HEADLINE inflation in December 2008 was 14.6%, while CORE (non‐food) inflation was9.2%• Credit to private sector grew by over 50% % by the end of December 2008• GROSS liquidity injections by the Central Bank of Nigeria through expanded discount window andrepayment of maturing OpenMarket Operation (OMO) bills from September 2008 to 7 January2009stood at about ₦2.2 trillion. This had moderated interest rates in thee money market andcurrently interbank rates below the MPR.• The Expanded Discount Window facilityy to banks now stands at ₦275 billion (down from ₦1trillion as banks repay the temporary loans)• Repayment of maturing OMOO bills since September 2008 is ₦1.2 trillion• Stockof External Reserves stood at US$52.9 billion as at the end of December 2008, with ‘ExcessCrude’ balances at about $20billion (relative sharp decline in the inflow of forex relative to thedemand pressure).• Exchange rate allowed adjusting to reflect the demand pressuress relative to supply: the exchangerate depreciated from ₦117 to t ₦135 per r US dollar asat the end of o Decemberr 2008• As atMay, 2009, exchange rate depreciation is approximatelyy 20%, effectively translating toabout ₦2.5 billion extra revenue per day to the Federation Account• Stockmarket remained depressed as at end of December 2008• Outlook for oil price in 2009 is i about $51 (optimistic range) and below b $51 (pessimistic range)• Growth rate of GDP between 7 and 9% % still possible – despite the economic crisis and thisindicates that Nigeria will nott experience economic recession after the financial crisis• Totaloutstandingborrowing on Expanded Discount Window as at a 24 March 2009: ₦68.93 billionas shown in table2 below;Table 2: Outcomes: interbank interest rates and borrowingSource: A presentation by Professor Chukwuma C. Soludo (2009 a), Governor, CBN.
• Banks’ total risk assets as at end of February 2009 were ₦12.78 trillion.• Non‐performing risk assets as at end of February 2009 was 4.74%• Banks’ total loans as at end of February 2009 was ₦7.8 trillion• Total non‐performing loans as a percentage of total asset as at 28 February 2009 was 6.2%• Estimated non‐performing loans as at end of December 2009 was about 7.4%• Amount banks are prepared to turn over to an asset management company (AMCON) if suchwere set up by end of the year was ₦350–₦400 billion or approximately 4–5% of loans as atFebruary 2009• About 15 banks would have no need for AMCON• Of those that indicated interest in AMCON, there is hardly any for which it would threaten theirsolvency• CAMELS rating of the banks as at end December 2008, showed an average composite score of62% and average industry rating is satisfactory• Total shareholders’ fund as at end of December 2008 was ₦2.8 trillion• Average capital adequacy ratio of 22%, among the highest in the world• No bank has failed or gone out of clearing.LITERATURE REVIEWIntroductionThe term ‘financial crisis’ is applied broadly to a variety of situations in which some financialinstitutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries,many financial crises were associated with banking panics, and many recessions coincided withthese panics. Other situations that are often called financial crises include stock market crashes andthe bursting of other financial bubbles, currency crises and sovereign defaults. Financial crisesdirectly result in a loss of paper wealth; they do not directly result in changes in the real economyunless a recession or depression follows. Many economists have offered theories about howfinancial crises develop and how they could be prevented. There is little consensus, however, andfinancial crises are still a regular occurrence around the world.When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Sincebanks lend out most of the cash they receive in deposits, it is difficult for them to quickly pay back alldeposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing manydepositors to lose their savings unless they are covered by deposit insurance. A situation in whichbank runs are widespread is called a systemic banking crisis or just a banking panic. A situationwithout widespread bank runs, but in which banks are reluctant to lend, because they worry thatthey have insufficient funds available, is often called a credit crunch. In this way, the banks becomean accelerator of a financial crisis. Examples of bank runs include the run on the Bank of the UnitedStates in 1931 and the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008 has alsosometimes been called a bank run, even though Bear Stearns was an investment bank rather than acommercial bank. The US savings and loan crisis of the 1980s led to a credit crunch which is seen as amajor factor in the US recession of 1990–1.Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceedsthe present value of the future income (such as interest or dividends) that would be received byowning it to maturity. If most market participants buy the asset primarily in hopes of selling it laterat a higher price, instead of buying it for the income it will generate, this could be evidence that a
Page 1: Financial Crisis and BankingSectors
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Page 27 and 28: Soludo, C C (2009a), ‘Global Fina

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