The Central Bank of Nigeria (CBN) via its Prudential Guidelines of 2010 has the powers to takeover a bank. The CBN can invoke these powers under certain conditions provided in the banks Prudential Guidelines.
The CBN included these powers in its Prudential Guidelines in the wake of the Banking crisis of 2009 which paved the way for the creation of the Asset Management Company of Nigeria (AMCON). Since then the CBN has invoked these powers thrice, when it took over former Afribank, Spring Bank and Bank PHB respectively. .
The Central Bank according to provisions of its Prudential Guidelines can takeover a bank if any of the following conditions occur
1 If the bank is illiquid – The CBN under section 3.13d (V) of its Prudential Guidelines says it can “change management and/or board”
2 If the bank’s Capital Adequacy ratio falls below 5% – Under Section 3.16 of the Prudential Guidelines it can take over management and control and/or revoke the licence.
Here is an extract of the provisions. You can also download the Central Bank Prudential Guidelines here
First is if a bank is Illiquid.
The Central Bank defines an illiquid bank as follows;
A bank may be considered illiquid if;
(i) the bank’s current account with the CBN is overdrawn and not covered by the next working day consecutively for five working days within a month;
(ii) the bank suffers clearing operation deficits for 5 consecutive days i.e there was adverse clearing settlement position without adequate cover to the extent that recourse had to be made to the clearing collateral;
(iii) the bank is unable to pay maturing obligations for 5 consecutive days;and
(iv) the bank is a net taker of interbank deposit of up to 25% of its total deposits for a consecutive period of 90days
The CBN as part of its regulatory oversight function can take the following actions over a bank considered illiquid:
(i) invite management for a discussion on its plan to improve liquidity;
(ii) request the bank to realize assets that do not qualify for inclusion in liquidity ratio computation;
(iii) conduct spot check to investigate the problem of the bank;
(iv) advise the bank to divest from subsidiaries or related companies;
(v) change management and/or board;
(vi) solicit for short term liquidity support for the bank from Nigeria Deposit Insurance Corporation (NDIC);
(vii) suspend the bank from clearing until it makes good its clearing position;
(viii) provide financial support and other lender of last resort actions
Second is if the Bank’s Capital Adequacy ratio is low
- The minimum ratio of capital to total risk-weighted assets shall remain at 10% as prescribed in the circular BSD/11/2003 issued on August 4, 2003. Furthermore, at least 50% of a bank’s capital shall comprise paid-up capital and reserves, while every bank shall maintain a ratio of not less than 1:10 between its adjusted capital funds and total credit net of provisions. However, banks are encouraged to maintain a higher level of capital commensurate with their risk profile.
- (b) The existing definition of the constituents of capital, deductions from total qualifying capital and restrictions within and between primary (Tier 1) and supplementary (Tier 2) capital are generally consistent with the Basel Accord.
- (c) Tier 2 capital is limited to 100% of Tier 1 capital.
- (d) The general provision will be part of Tier 2 Capital where the bank’s specific provision for bad and doubtful debts has been made to the satisfaction of the CBN. However, such general provision will be restricted to a maximum of 1.25% of the risk weighted assets.
(e)Deferred tax assets are considered as intangible assets for capital adequacy purposes and should be deducted from total capital and reserves in arriving at total Tier 1 capital.
- (f) Based on a level of capital adequacy ratio below the acceptable limit, a bank may be classified as follows:
- (i) Under capitalised
- (ii) Significantly under capitalised;
- (iii) Critically under capitalised; and
- (iv) Insolvent
- (g) The conditions and corresponding supervisory actions for banks with the classifications under (c) above are stipulated below:
Condition of a bank | Restriction/supervisory Action |
Under capitalised banks (i.e banks with Capital adequacy ratio –CAR- greater than or equal to 5% but less than the prescribed minimum level of 10% |
|
Significantly under capitalised banks (i.e. Banks with CAR less than 5% but equal to or greater than 2%) |
|
17
Condition of a bank | Restriction/supervisory Action |
into the bank; iii) CBN to review business plan within two weeks and communicate to the bank its acceptability or otherwise;
which may consider the following options;
| |
Critically undercapitalized (i.e banks with CAR less than 2%) Insolvent banks (i.e banks that have negative CAR) | Take over management and control and/or revoke the licence |
Very enlightening post.
Enlightening