AMCON: Leading stabilizer amongst peer countries (2)

The jury is out as to whether these governments were booted out because of economic discontent or for purely political reasons. This financial crisis which is a one in a hundred year event was as surprising as it was profound. That is why there was high level and coordinated response by the world’s leading nations to defend western civilization as we know it. This is a way of life of democracy, capitalism, freedom of movement of investment flows, tradable goods and services. The U.S. led this initiative by saving AIG from collapse and the possible consequence of a rash of claims on the U.S. and the world’s largest insurer. It also protected Citicorp, the world’s largest payment and settlement bank. Citi was also one of, if not the largest forex trader in the spot, forward and futures market. The advanced nations’ coordination also helped to stem the sovereign debt crisis, by segregating mainstream Europe from the peripherals and the outliers. Emerging markets, developing nations and frontier markets also took measures with varying intensity to resolve the crisis within their jurisdictions.

This peer review seeks to determine the mechanism and the effectiveness of the institutions used in 5 nations, it also helps to evaluate the relevance, effectiveness and need for continuity in these countries with diametrically different levels of crisis. The evaluation is in two broad categories, the first and most important rates the intervening institution as a financial sector stabilizer and detoxifier. The second looks at the institution as a general macro-economic stabilizer. The first category of criteria determines the effectiveness of the intervening institution based on variables under its control. In this assessment, it is possible for an institution to be effective in arresting financial haemorrhage in turbulent or deteriorating macro-economic environment. In other words, the stabilizer could have reduced the riskiness of the financial system at a time of contracting GDP, using unemployment and spiking inflation.

This could happen when the level of NPL’s in the country is reducing and banking capital adequacy is improving. The criteria used for evaluating the 5 nations and their stabilizers include but are not limited to:

. Duration of our exercise i.e. the time it took to arrest systemic decline in risk asset portfolio quality, improving return on assets, improved net interest margins and increasing nominal earnings per share .

 Intervention cost in nominal terms broken down into:

. The amount spent on detoxifying the system of corrosive assets

. Amount spent on reducing the net asset value of troubled banks to zero, making them attractive

take-over targets

. The amounts used to recapitalize the bridge banks

. Loss recoveries and restructured facilities

. Aggregate employee layoffs prevented due to intervention

. The level of national bankruptcies and liquidations

. Banking sector profitability growth

. Aggregate taxes paid

. Deposit insurance premiums that would otherwise not have been paid if the banks had been

allowed to go belly up

. Total deposit premium of NDIC to date cumulative is N425.2billion. The bulk of this would have

been disbursed if not for the AMCON exercise

The Irish financial and economic crisis was one of the most expensive to fund globally, as the fiscal cost of the bailout was 49% of GDP. The magnitude of the crisis was severe as several macroeconomic indicators plunged and the economy went into a recession. After three years of existence, Ireland was able to exit its bailout programme, although the Irish bad bank still owes the IMF over $95bn.

The Swedish economy went through a severe financial, economic and currency crisis of the early 90s. Key macroeconomic indicators were severely hit. The fiscal cost to the taxpayer was approximately 4% of GDP or 71bn SEK. Political consensus and swift government intervention was key to the government rescue plan. Toxic assets were disposed off through an asset management company, which was dissolved in 1997, five years after being incorporated. The lessons of the crisis of the 90s adequately prepared Sweden to weather the storm of the 2008-2009 crises and to emerge relatively unscathed.

The U.S. financial crisis of 2008 was one of the worst economic downturns in the country’s history. Major financial institutions such as Countrywide Financial, Bear Stearns, and IndyMac failed. The US Federal Reserve invested approximately 2% of GDP to stabilize the nation’s financial system. The intervention program is yet to be wound up, however 89% of total NPLs have been recovered, 8% written off and 3% still outstanding. In July 2010, the U.S government passed a comprehensive financial reform law to prevent the use of a TARP like program in future.

The global crisis of 2008 did not severely affect the Malaysian economy. The financial sector was insulated from the crisis due to Malaysia’s strong regulatory oversight and well capitalized banks, a result of lessons learned from the Asian crisis of the late 1990’s. However, its GDP declined marginally in 2009 mainly due to reduced exports and general decline in price of commodities. The cost of the bailout was $18.1bn which was a fiscal package engineered to stimulate long term growth of the overall economy.

There are those who rightfully think that AMCON’s existence poses a moral hazard and thus it will be good to mothball it. This school of thought including the IMF fail to understand that the key to economic development is leverage and thus the Nigerian aggregate corporate, mortgage and government debt is still very low compared to its GDP at 19.4%. Therefore, our view remains that AMCON should be institutionalized as a financial system shock absorbing detoxicant whilst the economy continues to undergo fundamental shifts to its structure.

The study reveals that using most criteria of arresting systemic haemorrhage and stabilizing banks, whilst catalyzing recovery, the Nigerian AMCON performance surpasses Ireland and Sweden and is a macro-economic success story thus far.

Amongst the five countries reviewed, cutting across four continents, AMCON ranked 3rd, ahead of Republic of Ireland and Sweden. The study shows that AMCON’s dual role of recapitalizing insolvent banks and asset detoxicant, the duration of the exercise may exceed the date originally anticipated.

There are moves within the National Assembly to amend the AMCON act to address some of the issues raised in this peer review study, however, considering the early stage of economic maturity in the country’s development life cycle, Nigeria will need to accept that it is likely to face more cyclical headwinds in the future. Therefore, the banking system will continue to confront stress situations in the medium to long term.

Thus, we are of the view that AMCON will be institutionalized to mitigate these cyclical risks and the attendant consequences on the quality of the banking portfolios. To address the moral hazard risks which are real, there will be the need for strict reinforcement of covenants and collections from defaulting obligors.

Also, greater emphasis must be placed on institutionalizing risk management principles in the banking system to ensure that the lessons of 2009 crisis are not lost, and that Nigeria will benefit from the snakebite effect like Malaysia and other South East Asian economies did after the 1995-1997 crisis.

Financial Derivatives Company Ltd