First opened in October 2008, the Expanded Discount Window (EDW) appeared in practice to have been set up primarily as a ‘‘pressure valve’’ to help ensure the continuous availability of liquidity options for Nigerian banks during times of severe market stress. This window succeeded in smoothening liquidity mis-matches on bank balance sheets and ensured calm and steady operations of the interbank market. It allowed for the use of less liquid short-term instruments such as Guaranteed Commercial Paper (GCP) and Bankers Acceptances (BA) as collateral for longer tenured facilities (up to 360 days).
Similarly, passage of the Asset Management Corporation (AMCON) bill, presently awaiting presidential assent will pave way for the formal establishment of the Corporation believed to be the principal vehicle for recapitalization of distressed banks. The Corporation in the case of rescued banks will be expected to play the role of facilitating mergers, acquisitions or capital injection by new investors. It will ensure that shareholders recover part of their lost investment as well as assist in reducing the debt overhang that has slowed down the recovery of the capital market. While cleaning up toxic assets, it will equally smoothen liquidity mis-matches on bank balance sheets.
The Central Bank of Nigeria (CBN) explicitly stated in its official circular opening up the EDW that: ‘‘Institutions seeking to utilize the EDW must first fully exhaust all alternative market sources. The EDW is to be approached on a last resort basis only.’’ This clause supported the argument in some quarters, that the EDW was a red flag item that many of the banks did not realize early enough. As a result, they embraced it wholeheartedly and fell under the regulator’s hammer of August 2009.
Industry experts are therefore concerned that the AMCON window might be another red flag for banks if the pitfalls of EDW were not avoided. One of the pitfalls was that illiquid assets of quality and pricing that are indeterminable by exhausting all alternative market sources, were used as basis for securing financing from a single buyer with unlimited purchasing power, the central bank. This gave rise to the question of transparency of the entire process and the potential for a longer term crisis originating from the ultimate treatment of the assets.
Again, CBN should not use the AMCON window as bait just as it seems to have done in the case of banks that regularly used the EDW. The CBN governor Mallam Sanusi Lamido Sanusi stated in August 14th 2009 that:
‘‘As at June 4, 2009 when I assumed office as Governor of the CBN, the total amount outstanding at the Expanded Discount Window was N256.571 billion most of which was owed by the 5 banks.’’
So, while sacking the Managing Directors of the affected banks, Sanusi noted that a review of activity in the EDW showed that four banks had been almost permanently locked in as borrowers and were clearly unable to repay their obligations. The banks’ activities pushed up the interest rate paid to private sector deposits. They contributed to the destabilization of the inter-bank market as many of their competitors were unwilling to take an unsecured risk (now guaranteed by CBN) on them.
An investment banking expert and head of capital market research of Capital Bancorp Limited, Mr Tajudeen Olayinka belived that the benefit of AMCON window will only depend on transparent, proper valuation of toxic assets in the books of banks. He warned CBN against any attempt to coerce the banks into using the window.
According to him, ‘‘I suspect CBN intention to coerce the eight banks to access the window in a manner that may be injurious to the shareholders of the affected banks. Such an uncivilized conduct and the market suspicion of CBN’s intention will not be in the long – term interest of the Nigerian economy. My responses in this interview represent my view as a financial analyst and not the view or position of my company as we view developments in the economy.
‘‘CBN is expected to be more responsive and transparent in its dealing with the banks and their shareholders. Current actions of CBN are not suggestive of this expectation of the market. The current CBN Governor has continued to run the CBN as an organization without a board. The other board members are simply there to concur with Sanusi’s concept of banking. There is danger looming in the corner with this kind of CBN structure where dictatorship is the order of the day. In my view, the current CBN Governor appears to be acting a narrow script and has successfully injured the economy using this ignoble process,’’
If the economy must grow realistically, the Federal Government of Nigeria must remove tendency for dictatorship in the banking industry,’’ Olayinka stated.
He noted that CBN asked the banks to clean up their books. Having complied by writing off non-performing loans, it is not likely that the banks would prefer to use that window as against more viable alternative windows that will still preserve the value of those assets. Some of those assets, especially those that are related to stock market still have prospects for future value. So, it would be in the banks’ interest to allow the market to recover, so as to reduce losses they have incurred.
