James Emejo in Ibadan
Nigeria Deposit Insurance Corporation (NDIC) Managing Director / CEO Mr. Bello Hassan said yesterday that an effective methodology for determining a realistic Target Fund Ratio (TFR) was being developed in the framework of measures to improve the deposit insurance system and align with the present reality.
Hassan said this during the opening of the NDIC 2021 workshop for the Finance Correspondence Association of Nigeria (FICAN) on the theme: “Enduring Extreme Disruption: Resilience and Reinvention for Banking System Stability and Deposit Insurance”, which took place. held in Ibadan, Oyo State.
The Funding of Deposit Insurance Systems from the International Association of Deposit Insurers (IADI) (2009) states that an appropriate target fund size should be sufficient to at least cover the potential losses of the deposit insurer in normal conditions.
Essentially, the TFR is the ratio of funds that often determines the optimal level of funds that allows a deposit insurer to effectively meet its obligations to depositors.
All insured banks pay a premium to a pooled fund that NDIC uses to resolve payments in the event of bank failure.
Hassan said the company has started reviewing banks’ approach to premium determination to make it more risk-based, so that the likelihood of risk crystallization becomes a major factor in the methodology of premium pricing in the future.
He said the move was aimed at ensuring that insurance coverage remains adequate to support the goal within the banking sector.
The CEO underlined that the company had also developed a strategy which accentuates the existing framework.
He said that as economies around the world continued to grapple with the devastating impact of the COVID-19 pandemic, it had become timely and highly desirable for regulators to develop appropriate strategies necessary to build the resilience of the country. financial system.
This, he said, has become inevitable as the financial sector seeks to provide much needed support for the federal government’s economic recovery agenda.
Hassan added: “Our main objective is therefore to expand the deposit insurance framework; provide timely support to insured institutions as needed; ensure faster and orderly resolutions of insured liquidated institutions; as well as to continue to help the central bank to promote the stability of the banking system ”.
He said there had recently been appeals to the company to improve the provision of support to insured institutions facing financial difficulties.
To this end, Hassan said: “We have identified the need to reconsider our framework, to provide realistic terms and conditions that will allow eligible insured financial institutions to quickly access technical and / or financial support, in accordance with S. (2) (1) (b) of the NDIC law, while protecting the company against possible downside risks.
He said NDIC was also working with relevant stakeholders, to ensure that the company discharges its responsibilities effectively and unhindered, following the revocation of licenses of any institution insured by the CBN.
He said: “It has become more important to us, which requires improving our resolution processes for liquidated financial institutions.”
He identified the slow recovery and realization of assets, as well as litigation by former shareholders and creditors of closed banks as some of the obstacles hindering effective and timely resolutions of liquidated institutions.
Elaborating further on the proposed revision of premium thresholds, the NDIC boss explained that the rationale for the revision was to be able to scientifically determine the deposit insurance fund that should be held at all times to deal with the risks that arise. crystallize.
He said, “What’s that risk? It is the risk of making payments; you know as a deposit insurer we say we have guaranteed a maximum amount; so what is the risk of this institution collapsing?
“And if it collapses, how much funding do we need to put in place to be able to deal with this responsibility which may crystallize.”
He said: “And so we are looking at various scenarios in the reverse frame, but we basically want to make it risk-based by looking at the various factors that could impact the viability of the bank so that we can say that it is can. -be the number of banks likely to collapse.
“And if they collapse, do we have enough funds to be able to make that payment?”
“And because this is our own model of ex ante deposit insurance, we collect premiums to build the fund before the event happens.”
He added: “It is not when the event occurs that you start to buy funds no, the funds are already there but what we want to do now is to be able to say that yes, scientifically it is. is the amount we should have in this fund which is considered sufficient to cover any liabilities if it crystallizes on the deposit insurer.
In January 2015, the NDIC had granted a cumulative amount of 192.6 billion naira in deposit insurance premium discounts to deposit banks (DMB) between 2012 and 2014.
It also reduced the deposit insurance premium rate of all DMBs in the country as part of efforts to help stabilize the financial system and promote public confidence in the banking sector.
The premium reduction policy was initiated to consolidate the gains made by the company’s migration from the lump sum premium system (FRPS) to the differential premium valuation system (DPAS).
The DPAS approach takes into account the risk that each bank poses to the system and encourages banks to adopt sound risk management practices
The company granted further relief to DMBs in September 2014, reducing the base rate of insurance premiums from 40 to 35 basis points.