This content is from: Local Insights

The bridge bank mechanism

Chinonyelum UwazieVincent Iweze

In 2009, a banking crisis rocked the Nigerian financial industry when the Central Bank of Nigeria (CBN) discovered that 10 of the 24 deposit banks were highly undercapitalised. Worries persisted, albeit subtly, until recently when the Nigerian Deposit Insurance Corporation (NDIC), the body responsible for insuring deposits of money institutions in Nigeria, took over the management of three of these banks due to their failure to demonstrate their ability to recapitalise by the September 30 2011 deadline set by the CBN.

The three banks – Spring Bank, Bank PHB and Afribank – according to the CBN showed no indication of being able to meet the recapitalisation deadline thus necessitating the establishment by the NDIC of three bridge banks, Enterprise Bank, Keystone Bank and Mainstreet Bank, respectively, to assume their assets and liabilities.

The Nigerian Deposit Insurance Corporation Act 2006 provides a number of mechanisms which the NDIC may adopt in resolving crises involving financial institutions. It recommends that where appropriate the NDIC may give financial assistance to enable troubled institutions to meet obligations to depositors and creditors. The NDIC is also authorised to take over the management of a failing insured institution until the institution's financial position improves.

A third option is the adoption of the bridge bank mechanism, where appropriate, to enable newly-incorporated bridge banks to assume the assets and liabilities of failing financial institutions pending further resolution or sale.

Similar to the practice in the USA under the Federal Deposit Insurance Corporation, adopting the bridge bank mechanism will require the NDIC to advance funds to aid the operation of the bridge banks, as well as appoint and remove members of the board of directors as was done in the case of the three Nigerian bridge banks. Typically, the bridge bank will have a life span of two years from the date it was issued a licence unless a merger, consolidation or sale causes an earlier termination of its affairs. The NDIC may in its discretion extend the two-year life span to a maximum of three additional single year periods, after which it will commence liquidation proceedings.

Unlike the extensive provisions and guidelines under the US law for operating bridge banks, the Nigerian legislation failed to lay down guiding principles for such operation. NDIC's failure to stipulate clear rules or guidelines on issues such as the events that would trigger the adoption of the bridge bank mechanism and the operation of such banks led to massive withdrawal of deposits from the affected banks as well as panic offloading of the stocks of the three banks whose assets were assumed by bridge banks from the Nigerian Stock Exchange. The NDIC stands by its decision, however, arguing that the mechanism is comprehensively tailored to maintain stability and enhance confidence within the system.

No doubt, the nationalised banks suffered devastating consequences shortly after the NDIC pronouncements, as reports indicate that the shares of the said banks were suspended. However, given the volume of assets these banks possessed, it is anticipated that the newly-appointed managers of the bridge banks will implement programmes that will aid subsequent satisfactory acquisitions by third parties. These bridge banks may, therefore, be the ones that domestic and foreign investors wishing to invest or expand operations in Nigeria should be watching.

Chinonyelum Uwazie

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