In this paper, the implications of the increased competition in the banking industry are discussed in Section Two whilst the paper ends with a conclusion in Section Three.
Whereas, competition is good for individual banks, the customers, and the banking system, increased competition has implications which should be carefully identified and accorded the necessary attention. In a broad sense, some of the implications of increased competition in the banking industry which have direct bearing on the system’s stability include the following,
among others:
Effective supervision;
Effective risk management;
Strong corporate governance;
Market discipline;
Self-regulation; and
Enabling legal and judicial environment.

Each of these implications is briefly discussed hereunder.

Effective Supervision
The current supervisory approach in Nigeria which is transaction- and compliance- and is narrow in scope and uniformly applied to all supervised institutions. With consolidation, there is the need to adopt a robust, proactive and sophisticated supervisory process that should essentially be based on risk profiling of the emerging big banks. In other words, the adoption of an appropriate risk-based supervisory approach is imperative with consolidation. The approach entails the design of a customized supervisory programme for each bank and it should focus more attention on banks that are considered to have potentially high systemic impact. The approach should enable the supervisory authorities to optimize the utilization of supervisory resources. That necessarily requires that supervisors should have a clear understanding of the risk profile of the emerging big, and sometimes, complex banks. There is therefore, the need for capacity building – in this area.
Furthermore, consolidation has, no doubt, brought to the fore the need for consolidated supervision that requires more regular consultation and closer cooperation amongst the various regulatory/supervisory institutions in financial system. This is because the larger banks are going to be complex as they are likely to engage in non-traditional activities that permissible under universal banking. It is equally imperative that the reporting format of banks be reviewed so as to incorporate all possible activities that banks would undertake after the consolidation. This will make it possible for supervisors to obtain a global view of the bank’s operations. The current efforts of the CBN/NDIC in the development of an electronic Financial Analysis Surveillance System (e-FASS) and the activities of the Financial Services Regulation Coordinating Committee (FSRCC) would go a long way to assist in this regard.
Effective Risk Management Systems
Although effective risk management has always been central to safe and sound banking practices, it has become even more important in the post consolidation banking era than hitherto as a result of the on-going bank consolidation programme. It is important to indicate that the ability of a bank to identity, measure, monitor and control risks under the emerging banking environment can make the critical difference between its survival and collapse. For a bank to efficiently and effectively play its role under the emerging dispensation therefore, the deployment of an effective risk- management system with the following key elements is imperative:
• Active board and senior management oversight:
• Adequate risk-management policies, procedures and exposure limits;
Effective risk identification, measurement, monitoring and control framework;
Comprehensive management information system; and
Efficient internal controls.

It is on the basis of the foregoing that the Regulatory Authorities recently issued guidelines for the development of risk management systems by banks. The adequacy or otherwise of the developed risk management systems will be assessed on an on-going basis by the Regulatory Authorities (i.e. CBN and NDIC).

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Strong Corporate Governance
While good corporate governance has remained imperative in the banking system, its importance in our nation’s emerging banking environment is based on the fact that managements of most of the ‘new’ banks would be insulated from abusive ownership. Besides, there are many other stakeholders with goals, interests and expectations that do not necessarily coincide, and as a result, they constitute major areas of frictions. A bank is therefore expected to put in place a governance structure that will seek to balance all stakeholders’ interest, goals and expectations. This is the essence of a good corporate governance.
Corporate governance is about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that would foster good corporate performance. It is also about how to build trust and sustain confidence among the various interest Coups that make up an organization. Indeed, the outcome of a survey by Mckinsey and Company in collaboration with the World Bank in June 2000 attested to the strong link between corporate governance and investors’ confidence, In fact, it has been amply demonstrated that, with the possible exception of massive macroeconomic instability no one single factor contributes more to institutional problems than poor corporate governance.
Disclosure and transparency are key pillars of a corporate governance framework, because they provide all the stakeholders with the information necessary to judge whether or not their interests are being served. I see transparency and disclosure as an important adjunct to the governance process in banks as they facilitate banking sector market discipline. For transparency to be meaningful, information should be reliable, accessible, timely, relevant and qualitative.
With the emergence of bigger banks in Nigeria, weak or poor corporate governance becomes a more serious issue as the failure of large banks could cause systemic problems while posing operational difficulties to the supervisory authorities in resolving them. In view of the fact that the systemic repercussion of the failure of a big banking institution is grievous, the Regulatory Authorities recently issued a new code of corporate governance tagged “Code of Corporate Governance for Baits in Nigeria:
Post Consolidation”. The new code was developed to compliment the earlier ones and ensure the enthronement of responsive corporate governance in the banking industry
Market Discipline
The current information disclosure requirements in the industry are grossly inadequate to effectively bridge the information asymmetry between banks and investing public that consolidation has inevitably created. Under the consolidated banking environment, it is important that the accounting as well as disclosure requirements of the consolidated banks be reviewed. In that regard, the Regulatory Authorities are currently reviewing information disclosure requirements so as to minimize information asymmetry between baits and investing public. This has become necessary to ensure that business decisions by the investing public are well informed under the new dispensation. Adequate information disclosure requirement will make banks to pay greater attention to reputational risk that could result in loss of confidence as well as patronage. As a necessary step to promote market discipline, it is important to indicate that the lull weight of the provisions of relevant laws would be brought to bear on erring operators in order to help promote safe and sound banking practices under the consolidated banking environment. The policy of zero-tolerance against unethical behaviour would be strictly applied.

Self-Regulation And Self-Discipline
Given the size and the envisaged complexity of operations of the emerging banks post-consolidation, regulation and supervision of banks have been made the joint responsibility of both the Regulators and operators. That is, statutory regulation has to be complemented by self-regulation through strong corporate governance arrangement. This development has become necessary in view of the realization that self-regulation and self-discipline are critical to the promotion of a sound, transparent, accountable and efficient I financial market.
Given our conviction on the efficacy of self-regulation, the Regulatory Authorities will continue to encourage banking institutions in a consolidated banking environment to draw up and bind all their staff to a code of ethical and professional practices. Effective self-regulation as we all know, requires probity, transparency and accountability, which are yet to be fully entrenched in the system. Necessary steps are being taken by the regulatory/supervisory authorities to encourage these virtues and operators have also appreciated the need for compliance with rules and regulations to promote healthy competition since self-regulation does not amount to elimination of regulatory controls and supervision. It only confers some measure of confidence and trust in the ability of organizations to regulate themselves in the public interest. In this regard, it is noteworthy that the Bankers’ Committee had issued a code of Ethics and Professionalism to guide their officers and employees in discharging their duties. Also, Committees such as Board Ethics and Good Governance’ are becoming a regular feature of the Board Structure of Nigerian Banks.

Responsive Legal and Judicial Environment
Without an effective legal and judicial process, the effectiveness of the Corporation in its bid to contribute to the banking system stability would be severely impaired. As the deposit insurer, NDIC requires a responsive legal and judicial system to enhance its effectiveness. Adequate legal powers for the Corporation will facilitate prompt payment of insured depositors and guarantee speedy debt recovery and realisation of assets in the event of bank failure as well as minimize losses to the Deposit Insurance Fund (DIF). In this regard, I am happy to indicate that the Corporation’s proposed amendments to its enabling Act have been passed by the National Assembly and it is awaiting Presidential assent. It is my belief that the new Bill, when signed into law, will enhance the Corporation’s ability to execute its mandate.
With regard to the judicial environment, it is on record that most lawyers exploit the subsisting judicial processes and procedures to cause undue delay in the dispensation of justice when they know they have bad cases. Most of the times you witness lawyers obtain ex-parte orders from courts, these are orders sought without putting the other party on notice for frivolous reasons. In most instances, interim and interlocutory injunctions, stay of proceedings are obtained only to stall proceedings. Also, frivolous appeals and other forms of abuse of court processes are some of the tactics employed by lawyers to pervert the cause of justice. A good example of abuse of judicial process is the Savannah Bank’s case, where the plaintiff who went to court to stop the liquidation of the bank after the Central Bank of Nigeria (CBN) had revoked its operating licence in 2002 had kept prolonging or delaying the proceedings through various types of applications in court. It was only in September this year that the Federal High Court dismissed the case against the plaintiffs who have again filed an appeal in the Appeal Court. The litigation instituted by the erstwhile owners of the failed Peak bank whose licence was revoked in 2003 also still remains in court.
Again, out of the 13 banks whose licenses were revoked in January 2006, following the bank consolidation programme of the Federal Government, the Corporation has to date been appointed liquidator of only 8 of the banks and provisional liquidator of 3. The owners of the remaining 3 closed banks are currently challenging the revocation of their licenses in court, thereby frustrating the process of paying the affected depositors by the Corporation.
In this chapter, an attempt has been made to discuss the implications of the increased competition occasioned by the regulation-induced consolidation programme of the banking industry. In the main, some of these implications identified to have direct bearing on the system’s stability are related to supervision, risk management, corporate governance, market discipline, self regulation and an enabling legal and judicial environment. Notwithstanding the enormous challenges posed by the keen competition in the industry as a result of consolidation, there is no doubt that the regulatory/supervisory authorities shall continue to be proactive and put in place policies to guarantee safety and soundness of the banking industry This is especially achievable through collaborative efforts of all stakeholders.