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Why do depositors no longer lose money even when banks collapse?

Bank collapse and failure are the key reasons why depositors lose their monies and this results in the closure of banks by regulators. A bank…

Bank collapse and failure are the key reasons why depositors lose their monies and this results in the closure of banks by regulators.

A bank is closed down when it fails to function efficiently, leading to the collapse of one or more financial institutions.

In Nigeria, the Central Bank and the Nigeria Deposit Insurance Corporation are responsible for deposit insurance and guaranteeing the settlement of insured funds when a deposit bank can no longer repay its depositors.

In the past, banks could collapse and depositors would be in shock and confused about how they can retrieve their deposits.

Recall the Savannah Bank closure that left individuals and businesses stranded because there was no prior notice to the bank or its customers which led to the loss of huge deposits.

The closure of the bank made many people uncertain of the security of their deposits in banks and it made many people reluctant in opening bank accounts.

However, that is no longer the case as the CBN alongside the NDIC have introduced policies and regulations to protect customers’ deposits.

What are these policies and regulations?

In May 2010 the Central Bank of Nigeria issued the revised Prudential Guidelines (PG) to deposit money banks and the main objective is to protect the stability of the financial system and protect deposits.

The introduction of the Cash Reserve Ratio (CRR) by the CBN has played a significant role in ensuring that depositors’ monies are safe with commercial banks.

Cash Reserve Ratio is the share of a bank’s total customer deposit that must be kept with the Central Bank, it is the CBN way to regulate the country’s money supply, inflation level, and liquidity in the country.

It is a mandatory payment that a bank must maintain with the apex bank at all times and is subject to change by the regulator. The CBN governor, Godwin Emefiele, stated that the move was part of efforts to curb excess liquidity in the banking system.

Recently, the apex bank set the requirement ratio to 32.5 per cent from 27.5 per cent.

Another factor that prevents depositors from losing their deposits when a bank collapses is the intervention of the CBN when they perceive that a financial institution no longer performs efficiently.

An example is the intervention of the CBN in the sale of Polaris Bank four years after the government took over Skye Bank.

Similarly, the Nigeria Deposit Insurance Corporation plays a vital role in making sure deposits are safe.

The corporation supervises banks to help reduce the potential risk of failure, protect depositors, ensure monetary stability and an efficient payment system as well as promote competition and innovation in the banking system.

They ensure that unsafe and unsound banking practices do not go unchecked. The supervision includes transaction based, consolidated, and risk-based.

What are the causes of bank failures and how can they be mitigated?

In the past, the fastest cause of bank failure was granting bank loans without collateral, this was a result of a lack of proper monitoring by credit administrators.

According to the NDIC, some deposit banks failed due to massive insider abuses by their owners and officials. The corporation added that a weak board of directors, poor corporate governance, inadequate risk management process and inadequate capital, as well as weak supervisory and regulatory measures cause bank failure in the country.

Experts have reiterated the need for stronger regulations and supervision to ensure a stable and sound financial system in the country.

This came shortly after the collapse of Silicon Valley Bank but CBN has assured that deposit banks have no link with the foreign lenders.

However, they believe the CBN should ensure that its policies and regulations are tighter and monitored appropriately to prevent any future crisis in the financial system.

This Explainer is produced in partnership with the Centre for Democracy and Development (CDD)

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