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CBN & cryptocurrency ban: The need for a payment system regulator (II)

Contributing to the ongoing debate on the ban of cryptocurrency, Nigeria’s Vice President Professor Yemi Osinbajo counseled the CBN to consider more effective and proactive regulation than outright ban. This is in line with the above topic, which we started last week, and concluding this week. In the advocated objective-based approach, regulation is carried out based on the objectives that the regulator is tasked to achieve. A regulatory structure based on objectives will have one or more regulators, each tasked with a specific objective such as prudential regulation, consumer protection or payment regulation. It will often be asked to do this on a cross-sectoral basis, which is, without regard to the type or function of institutions being regulated. The strength of this approach is that it allows a stronger link between two of the elements of regulation discussed above – the objectives of the regulation and the institutional structure. Where appropriate, aligning these two elements in this way can contribute significantly to the success of the regulatory regime.

The CBN is not an effective regulator of consumer protection. It is simply too much to ask of a regulator in this day and age to carry out this multitude of functions

There are currently two types of objectives-based approaches: Single, integrated regulator and Twin Peaks. An objectives-based approach could, alternatively, have more than one regulator, each tasked with different objectives. Twin Peaks is an institutional structure where there are two regulators each of which is tasked with securing one of the two major objectives of regulation –prudential regulation and consumer protection. Twin Peaks has been described as ‘the sound’ institutional model for financial market supervision. The financial crisis serves as empirical evidence that prudential regulation and conduct of business regulation are not necessarily closely aligned, with the implication of this being that a single regulator is not necessarily able to manage these two objectives and therefore there is a stronger case for an objectives oriented approach along the lines of Twin-peaks. Twin- Peaks would also appear to be cheaper than having multiple regulators. It would lead to economies of scale as compared with having multiple regulators. Moreover, Twin Peaks allows for a clearer focus on different regulatory objectives.

Where Twin Peaks assigns the central bank with the responsibility for prudential supervision, this usefully eliminates inter-agency fault lines in the flow of macro- and micro-economic information and locates all that information within the institutional group that will have to make critical lender of last resort judgment calls. On this basis, we argue that the CBN is not an effective regulator of consumer protection. It is simply too much to ask of a regulator in this day and age to carry out this multitude of functions, and for this reason we advocate the transfer of consumer protection of banks’ customers to a new consumer protection regulator (Financial Conduct Authority of Nigeria) that will work closely with the new Payment System Regulator also being advocated.

Goodhart et al (1998) have argued that ‘the ultimate criterion for devising a structure of regulatory agencies should be the effectiveness and efficiency of regulation in meeting its basic objectives’. Regulators are arguably most effective and efficient when they have clearly defined and precisely delineated objectives with clear and precise mandates. A clear and internal management focus is more likely to be created when the objectives of the regulator are clear and precise and this can be best achieved through an objectives-based regulatory regime, based on the Twin Peaks model. As systemic (macro-prudential) regulation is different from prudential (micro-prudential) regulation, there is a question whether both should be carried out by the same regulator. With a better understanding of the regulatory lapses that contributed to the recent 2008 financial crisis, it is appropriate for the same regulator to be responsible for both macro and micro prudential regulations.

As Twin Peaks allows this, it is therefore a desirable institutional structure for financial regulation. The objectives-based system using Twin-Peaks equips the regulators to respond to changes and developments in the financial markets. Systemic risk no longer arises with banks alone and can come from either Insurance or securities firms or both. Twin Peaks provides the opportunity to recognize (and address the fact) that systemic risk no longer arises with banks alone. Integrating both micro and macro-prudential regulation of banks, insurance and securities firms into one regulator gives that regulator the authority to supervise all firms posing either micro or macro-prudential risks. In effect, structuring the regulator based on objectives rather than institutions addresses the issue of systemic risk posed by both banks and non-banks.

With the assumption that the banking supervision of the banks, particularly the capital adequacy issues, is retained with the central bank, it is further argued that all aspects of prudential regulation of the non-core banking insurance, securities and other firms should also be transferred to the prudential unit of the central bank (Prudential Regulatory Authority of Nigeria). This will help in the comprehensive understanding and monitoring of the capital requirements of both the banking and non-banking activities of the financial groups or holding company which is in line with the merits of combining both micro and macro prudential regulation to ensure systemic stability. In the same vein, all consumer protection issues in both banking and non-banking activities should be transferred to a consumer protection agency (Financial Conduct Authority of Nigeria) that should be created for this purpose.

Moreover, as the central bank currently supervises the banks, what is therefore required is the strengthening of its regulatory capacity through the merging of the relevant units of the other regulatory agencies with that of the central bank (Prudential Regulatory Authority of Nigeria). This will ensure not only the application of economies of scale and scope in availability and utilization of skills but also effective regulation of the financial institutions through the sharing of ideas from their previous agencies and the enhanced tacit knowledge that will evolve. Even the financial institutions will prefer this approach due to the reduced bureaucratic and regulatory engagements that will emerge in addition to the lower regulatory fees that they will pay.

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