The collapse of a bank is much more than an ordinary event. When a bank collapses the stability of the entire banking system is at stake, and everything possible has to be done, speedily too, to ensure that the financial system remains stable. Depending on what the key factors are in a particular case, the regulators are required to move in and calm the troubled waters and assure all involved that the storms will not rock the boat. These will ensure that the banking system continues its role of financial intermediation.
So, speed is of the essence when a bank fails. It makes all the difference between a one-bank event and a contagion; between a high-cost and low-cost resolution. It decides whether the bank’s customers will survive or sink with it. In brief, the response to the collapse of a bank determines the fate of the local financial industry.
The world has witnessed this in the past few days, with the collapse of Silicon Valley Bank, and Signature Bank, New York. These events have also brought fresh memories of the events that shook Nigeria’s banking system in the dark days of the global financial meltdown. While the collapse of SVB has assumed an unmistakable position in America’s banking history as the largest bank to fail since the Great Recession, the speed of regulatory actions has been quite spectacular.
Of particular note is the joint action of the key regulatory agencies involved in the American financial system: the Treasury, the Federal Reserve Bank, and the Federal Deposit Insurance Corporation. In a joint statement on March 12 by the heads of these regulatory bodies – Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg – they said: “Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system. This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
They announced that depositors of both SVB and Signature would receive their deposits in full. The depositors of SVB would have access to all of their money starting Monday, March 13, the statement said. This announcement is in fact quite significant. As the bank’s deteriorating condition escalated, there was a run on it by depositors that led to about a quarter of its deposits being pulled out in a day, a situation that prompted the regulators to shut it down to prevent a total collapse of the bank. But the interesting point here is that, as some people have pointed out, the speed of the run on the bank has been ascribed to the power of social media and online banking.
By knitting people together social media now makes it possible for group members to take action faster; and, on its part, online banking gives customers more control over their money and they can now withdraw it without restrictions, from anywhere, anytime.
Within the rescue package was also the announcement by the Fed that it would release additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The regulators also noted that no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. In other words, public funds would not be used to bail out the banks.
In Nigeria, similar scenarios played out in the final stages of the resolution of the banking crisis in the country. I recall vividly the events of the weekend of August 5-6, 2011. On that Friday, the Nigerian Deposit Insurance Corporation announced that it had taken over the assets and liabilities of three banks – Afribank Plc, Bank PHB Plc, and Spring Bank Plc. As of that date, the authorities had concluded that it had become clear that the three lenders would be unable to meet the recapitalisation deadline of September 30, 2011, that was set for the rescued banks.
At a media briefing the following day, organised by the CBN, NDIC, AMCON, to finalise the resolution of the crisis, NDIC announced it had acquired the banks through three bridge banks – Mainstream Bank Limited, Keystone Bank Limited, and Enterprise Bank Limited – newly formed for that purpose.
On that occasion, as in the current American situation, the regulators made it clear that the interest of shareholders of the banks was not their cup of tea; that depositors’ interests would be protected, and that funds would be pumped into the banks to strengthen their operations.
“The primary objective is to stabilise the banking system,” Umaru Ibrahim, the Managing Director of NDIC then, said. “No depositor will lose a kobo. Depositors are safe. Employees are safe.” According to him, the banks would operate as stronger organisations and would be managed as going concerns.
For context, this was happening at the lowest ebb of activities in the Nigerian banking system, when the lenders had been emasculated by the cataclysmic events of about two years, starting from the events of August 14 that year, when the governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi, launched his banking-sector stabilisation programme.
Throughout that exercise, a key consideration was how the reforms would be financed: was it the government or the private sector that would bear the cost? If the government was going to fund it, how would it raise the funds at that time when financial assets had fallen to their lowest levels?
The fall of SVB should also teach our banks a lesson on handling customers in the new milieu defined by network power. That lesson is that banks can no longer trifle with their customers because a few hours of customers’ fury can drain a bank of its deposits.
With the pains that Nigerians are currently going through as a result of the naira redesign, some banks have shown they still have to catch up on this reality. Their customers are still kings, and that powerful position has been strengthened by social media which now ensures instantaneous dissemination of information.
This is a force the banks can no longer overlook or take for granted.