Bridge Banks and Shareholders of Failed Banks – Victims or Culprits?

Image sourced from the Nigerian Voice

On Friday, the 21^st of September, 2018, the Central Bank of Nigeria (CBN) revoked the banking licence of Nigeria’s Skye Bank and together with the Nigerian Deposit Insurance Corporation (NDIC), announced the establishment of a bridge bank to assume the assets and liabilities of Skye Bank.

Bridge banks are set up to take over the operations of a failed bank pending the consequent sale to a new investor. The primary objective of this is the management and avoidance of systemic risk. Bridge banks are typically established for a restricted period of not more than three years, with a general average of two years. The establishment of a bridge bank does not necessarily translate to an automatic business rescue; failure to find an investor within the relevant time-frame will result in a liquidation of the operations of the bank.

The September 2018 action by Nigeria’s central bank is not the first in the history of the country. In August 2011, the CBN and NDIC set up bridge banks to assume the assets and liabilities of three indigenous banks - Afribank, Bank PHB and Spring Bank. The bridge banks were consequently acquired by the Asset Management Corporation of Nigeria (AMCON) with the objective of strengthening liquidity. These banks were subsequently sold by the AMCON with the now defunct Skye Bank acquiring one of the bridge banks barely 4 years ago.

When a bridge bank gets established in Nigeria, it is typical for shareholders of a defunct bank to commence agitations regarding their residual interests and fate of their investments. This perhaps exemplifies one of the thin differences between investor protection and consumer protection. The CBN and NDIC have a duty to manage systemic risk and ensure the protection of deposits. According to a 2011 report by the NDIC, the minimum percentage of deposit liabilities to the total assets of the three failed banks in 2011 was 65%.

Section 39 (1) of the NDIC Act permits the establishment of a bridge bank which fosters the mitigation of systemic risk, avoids disruption to banking services and minimizes the impact on depositors and other stakeholders.

The stakeholders of concern to the NDIC and CBN clearly does not include the shareholders of a failed bank. This questions the status of shareholders as culprits or victims of a failed bank. Following the removal of the incumbent management of Skye Bank in 2016, it is unclear what steps the shareholders took to restructure and re-position the bank and appoint a substantive management team to run the affairs of the Bank. Save where the shareholders can prove to have been incapacitated owing to regulatory action, their inaction alludes to a lapse in corporate governance and a failure on the part of shareholders to actively participate in the decision making process of their banks and institute business rescue proceedings which mitigates the risk to all stakeholders including themselves.

The international association of deposit insurers has identified macro and non-macro factors which may cause a banking crisis or individual bank failure.[1] These include economic recession, unsound financial regulatory/supervisory system, financial deregulation, political issues, unsound banking practices, inappropriate risk management, poor corporate governance and management fraud or embezzlement.

The CBN confirms the issue with Skye Bank to be non-macro stemming from “unacceptable corporate governance lapses as well as a persistent failure to meet minimum thresholds in critical prudential and adequacy ratios”. If the statement by the CBN is anything to go by, the regulator was constrained to take the current action owing to the failure of the shareholders of the Bank to recapitalize it.

Experience from the deployment of the bridge bank mechanism in 2011 appears to confirm that when banks fail, shareholders are not regarded as victims who require compensation or protection by the banking regulator.  

This does not however serve as a validation of the actions of the CBN and NDIC, a number of issues remain unclear at this point as well. For instance, it is unclear if Skye Bank was given a deadline within which to recapitalize which it failed to meet, or if shareholders were given the opportunity to examine the issues from an informed perspective at a duly convened meeting by the management team appointed by the CBN.

Nonetheless there are interim lessons for the shareholders of other banks. It is instructive for shareholders of other banks to actively ensure the Board and management of their banks steer clear of troubled waters and preserve their investments, demand information if none is provided, and requisition a meeting if none is called.

So, Victim or Culprit? What do you think?

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[1] IADI – Guidance on Bank Resolutions Consultations – 2005 – page 11 available on www.iadi.org