On CBN ceasing to play banker of last resort role

Written by the Editorial Board of The Guardian Newspaper

Godwin Emefiele, Governor of the Central Bank of Nigeria (CBN), was recently reported to have informed the audience at the 10th Annual Banking and Finance Conference of the Chartered Institute of Bankers of Nigeria (CIBN) that the CBN would cease to perform the role of Lender of Last Resort. In his words, Mr. Emefiele stated that “in line with the national payments strategy, we are addressing settlement risks in the payment system by signaling that CBN will cease its implicit role of lender of last resort to the payment system.” Towards that end, the Governor confirmed that “CBN is facilitating the articulation of ‘survivor pays’ collateral management model in line with the BIS/IOSCO Principles for Financial Market Infrastructure (PFMI). Nigeria is clear in its objective of being internationally recognised for its compliance with international best practices and standards hence, the payment infrastructure is subjected to annual PFMI compliance review.”

What Emefiele was saying is that the CBN would stop playing the role of lender of last resort to the banks but that the framework, based on the principle of “survivor pays”, is being articulated under the facilitation of the CBN by unidentified person(s). That suggests that implementation would commence upon the readiness of the framework perhaps, without an exposure draft to all stakeholders. In essence, Emefiele was saying that although the CBN would remain the Banker to banks, it would no longer provide temporary/short-term financial accommodation (bail-out) to banks when and if the need arises. In other words, banks that may have need for temporary financial accommodation as a result of day-to-day operational dynamics in the payment system should look elsewhere, not the CBN, to cover their financial shortfall.

The CBN, on its own and single-handedly, is trying to rewrite one of its five primary functions which is Banker to Banks and Lender of Last Resort to Banks (not lender of last resort to the payment system). In the thinking of Emefiele, the lender of last resort role is only “implicit” to CBN’s functions. But that role has been a core and crucial function of central banks globally. It is crucial because it is meant to ensure stability in and sustainability of banks, the banking system and the economy. Indeed, Central Bank of Nigeria Act No.7 of 2007 in Section 42(2) provides that “…the Bank (that is CBN) may grant loans and other accommodation facilities at such rate of interest and such terms as the Bank (CBN) may determine to any bank which may be having liquidity problems.”

It is interesting that Emefiele tried to justify his initiative from two dimensions. One is to address what he called “settlement risks in the payment system”; and two, to have Nigeria meet its objective of being “recognised internationally for compliance with international best practices and standards.” Excellent justification! But has the CBN realistically, objectively and critically considered the risks its cessation as lender of last resort to banks will induce in the banking and financial system? If so, what remedies and mitigants have been or are being developed for such risks?

It will be an irony that, while the CBN is not only complaining but also seeking support to combat growing cases of cybercrime and electronic payment frauds, it is closing its eyes on or pretending to be ignorant of the more devastating risks that will obviously arise if it throws in the towel as lender of last resort to banks. The CBN should not, on one hand, be seeking to address settlement risks in the banking system and on another be contemplating introducing a policy that has the potential to completely destroy the fragile banking system. For as it were, it will be one thing for the country to desire to be recognised internationally for its compliance with international best practices and standards, but another if that should be attained at the altar of sacrificing our internal or domestic stability and sustainability. For sure, the CBN needs to first put its domestic banking system in order before seeking to be the bride of the international community. As often said, it is the beauty that is within that radiates and resonates without.

Unfortunately, the level of development of Nigeria’s financial system cannot, by any imagination, be compared with those of countries in Europe, America and even Asia. In Nigeria, the CBN is still playing understandable developmental roles most of which are taken for granted in most of the advanced countries. Furthermore, the CBN is still battling with: ensuring that the wide gap between lending and savings interest rates are reasonably narrowed to encourage savings and investments; getting banks to supply credible data that will facilitate proper understanding of happenings in the banking system and better planning; ensuring banks stop imposing excessive charges on their customers to inspire greater public confidence in the system; narrowing the huge informal market that weighs adversely on the effectiveness of monetary policy; reducing the increasing rate of non-performing credits in banks which is injurious to the system; raising the level of financial literacy and inclusion in Nigeria; and a host of other challenges with their attendant complex risks for the financial system.

There is, therefore, the need for Emefiele and his team at the CBN to face these and other challenges that have been clear sources of drawbacks to the development of the banking and financial system, nay, the Nigerian economy rather than the attempt to repudiate what has become not just a norm but a creed in the banking world.

Let it be clearly stated that this economy needs no further shocks at this time. Any more shocks that arise, especially from the banking system, will be sources of aggravated distress to an already distressed citizenry. Whatever hopes of revival they are still hanging on will be lost.

It is absolutely difficult to see, for now, how implementation of CBN’s “survivor pays’’ collateral management model (which will require banks in temporary short supply of liquidity to look for money to cover their positions, not from CBN but from other sources) will be of help or benefit to our country’s banking system. It will rather pose serious dangers to a developing and fragile economy.

It should be assumed that the CBN simply flew a kite about its intention to stop playing the lender of last resort role. It is good that the framework is still in the works which implies that final decision is yet to be taken on this very contentious, dangerous and explosive matter. Whatever the already built and developed financial market regulators and operators are doing about abandoning one of the primary and central roles of central banks, CBN should, for now, be a distant on-looker. Except the CBN has prepared to take over ownership of some of the banks through the back door, Emefiele should shelve action on the proposed “survivor pays’’ policy.