Eco. 324 (4-2-2022–Online Discussion/Quiz—Financial Intermediaries, Banks and AMCON)

1. Banking services – Financial institutions, specifically commercial banks, assist their customers by giving them banking services like deposit and saving services. These institutions also give out credit services that assist their clients in catering to their immediate needs. The credit services could include mortgages, personal or educational loans.
2. Capital formation – Financial institutions assist in the creation of capital by increasing capital stock. Financial institutions can increase the stocks by organizing savings that are not in current use by customers and giving them to investors.
3. Monetary supply regulation – Financial institutions control the supply of money in an economy. The main objective of this control is to ensure that there is stability in an economy and limited chances of inflation. The financial institution tasked with this responsibility is the central bank, and it completes this task by transacting the government’s securities to influence liquidity.
4. Pension fund services – Pension funds are made by financial institutions to assist people in preparation for their retirement. These pension funds are investment means that these institutions create to ensure individuals have money after their retirement, which could be issued on a monthly basis.
5. Ensure economic growth of a nation – Governments play a vital role in controlling financial institutions, and the main objective is to help in the growth of an economy. When there are issues in an economy, financial institutions are mandated to provide loans with low interest to assist in maintaining an economy
6. Asset storage-Commercial banks provide safe storage for both cash (notes and coins), as well as precious metals such as gold and silver. Depositors are issued deposit cards, deposit slips, checks, and credit cards that they can use to access their funds. The bank also provides depositors with records of withdrawals, deposits, and direct payments they have authorized. To ensure the depositors’ funds are safe, the Federal Deposit Insurance Corporation (FDIC) requires deposit-taking financial intermediaries to insure the funds deposited with them.
7. Providing loans-Advancing short-term and long-term loans is the core business of financial intermediaries. They channel funds from depositors with surplus cash to individuals who are looking to borrow money. Borrowers typically take out loans to purchase capital-intensive assets such as business premises, automobiles, and factory equipment.

2.
1. Bank consolidation in the Nigerian financial system secured through
mergers and acquisition by increasing shareholders fund for investors confidence as well as financial stability and operational efficiency of the consolidated banks.
2 The bank consolidation
helps in storing up investment capital, enhances shareholders value, protects both creditors and depositors as well as lower costs and enhancing their liquidity positions.
3. Adequate capital brings financial stability,
growth and profitability.
4. An increased capital base of commercial banks will curb the incidence of distressed and technically insolvent banks which has been a plight to the banking institutions in the past and as a result of
low capital base of banks.

3. Risk in commerial banks
1. Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations.
2. Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions.
3. Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
4. Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.
3.1
How they can be mitigated
1. Strategic Planning
Successful banks tend to do well in the following
areas:
– Innovation to ensure profitability.
– Risk Management over the long run.
– Human resources, such as managerial talent
through the ranks.
– Marketing to specific customer base.
– Organisational design (mix of central and local control). 
2. Stress Test
Stress test is VAR analysis for extreme events.
Stress tests involve identification of consequences
of portfolios of worst cases. Examples, oil price crash, stock market crash.
Inability to perform a stress test may show
accounting limitations.
Controlling Risk Fraud
Solution: external, internal auditing, examinations.
3. Managing Existing Customers
Easy to neglect existing customers when managing
risk and coping with change.
Strategic pricing so existing customers are not
disadvantaged (UK mortgage lenders and mobile
phone companies do the opposite).
Maturing relationships with existing customers.
3. Managing Market Risk
Value at Risk (VAR) models. Defined as the total value of the potential loss in market value that the bank stands to lose from holding a market position.
VARx = Vx * dV/dP * ∆Pi
Where VARx is the market value of position x,
dV/dP its sensitivity to price moves per £ market value and ∆Pi is the price movement over time.
Assumptions are required on distribution of price changes (e.g. normal), serial correlation and
stability of volatility.
Problems “fat tails”, excess skewness and kurtosis
in distributions. This suggest that normal
distribution gives little information on unlikely
events such as 1987 equity market crash, 20
standard deviations.
Even for standard events, assumptions of serial correlation may be unrealistic because the future does not resemble the past.
VARS may generate adverse market dynamics by requiring banks to sell all their assets at once.

4.
As the CBN governor I will tell Mr president that, Yes, the rationale behind the enactment of the AMCON Act and subsequent establishment of the corporation have been justified. Recall, prior the establishment of the corporation, the Nigerian economy was in a dire state. There were foreign portfolio withdrawals of credit lines & investment from Nigeria; the stock market also collapsed leading to loss of about 80 per cent of its value and the banking Industry crisis deepened due to poor risk management that led to increase in the non-performing loans (NPLs) of the banks as a percentage of industry loans. At a point in 2009 NPLs as percentage of all bank loans was as high as about 37.25 per cent. I salute the courage and the wisdom of the Central Bank of Nigeria (CBN) for quickly intervening by proposing to the National Assembly the need to set up an Asset Management Corporation to stabilize the economy, which was the global trend at that time.
AMCON is a blessing to the economy of this great country. Despite the lingering economic challenges and deliberate tactics of some recalcitrant obligors, the Corporation has recorded quite a lot of successes. In the first place, we supported so many businesses immediately after the global economic crisis. Some of them are doing well now. The financial institutions were equally supported to avoid a systemic collapse. Some banks are operating today due to AMCON’s intervention in the industry. In terms of recoveries, so far, we have made a total recovery of above N1.2 trillion. We have sold assets worth about N500 billion and have resolved close to 5000 Eligible Bank Assets (EBSs). The corporation has paid over N2 trillion to the CBN. The fundamental objectives for the establishment of AMCON was to rescue commercial banks and some underlying strategic businesses in Nigeria from the brink of collapse in the aftermath of the global financial crises of 2008 through acquisition of non-performing loans and to dispose of the underlying assets in the most profitable manner. AMCON also had the mandate to recapitalise the banks and to recover the debts using the various resolutions mechanisms created under the Act, which without mincing words I can tell you have been executed effectively. As at today, AMCON has achieved the first mandate of purchasing the Non-performing Loans (NPLs) and providing liquidity to the commercial banks. We are currently focused on the second and most difficult phase of recovery and restructuring of the bad loans.Recall that AMCON acquired over 12,000 NPLs worth N3.7 trillion from 22 banks and injected N2.2 trillion as financial accommodation to 10 banks in order to prevent systemic failure. As a result of this intervention our current liability with CBN is around N4.7 trillion; while the sum of N2 trillion had been repaid so far. In the area of supporting businesses, AMCON has also done very well especially in the aviation and manufacturing sectors. Our intervention efforts in Arik Air with the support and collaboration of the federal government did a great service to the growth of the sector. A similar intervention in Aero Contractors also saved the airline from collapse. As a matter of fact, the Nigerian Civil Aviation Authority (NCAA) certified Aero, which is under AMCON receivership to commence C-check maintenance services on Boeing series in Nigeria. This is a commendable feat in Nigeria’s aviation industry and there are several other companies that we have saved. Again, in an attempt to focus our resources on the recovery mandate, we have identified about 6,000 loans with outstanding balances below N100 million, which constitute only 20 per cent of our current portfolio. This portfolio has been outsourced to debt recovery agents under the Asset Management Partners (AMP) scheme, which has created huge employment opportunity for others. This has enabled the corporation to focus on fewer accounts, which make up 80 per cent of the portfolio. In our reckoning, if AMCON is able to resolve the nearly 2000 accounts it would have achieved more than 80 per cent of its recovery mandate. In line with our sunset period, we are tinkering with the idea of increasing the threshold of the AMP scheme to N1billion. We have also classified 350 accounts with current exposure of over N3.2 trillion into a category referred to as Criticized Assets. We consider the resolution of these accounts to be germane to the success of AMCON’s recovery mandate. We give special attention to these accounts at top management level and develop strategies for resolving them. The largest concentration is in the energy sector, which constitutes 27 per cent. As we have always stated, one of the major challenges to AMCON’s recovery mandate is the slow pace of our judicial processes. However, we have continued to engage with the judiciary, and we believe that there is now greater awareness about the role of AMCON amongst the Judges at the trial courts as well the Justices of the appellate courts and they have been supportive. Just as it is with the judiciary, the media have come to understand that AMCON is fighting for the good of all Nigerians because recovery of these monies and its judicious application to the Nigeria economy will improve critical infrastructure such as roads, rail lines, security, power generation and distribution, mass housing and a whole lot of others. That is what we have been doing in a nutshell.
Mr. President my justification is very in what AMCON is doing.

Name: Ezenaike Chukwuebuka Vincent
Reg no: 2016/234770
DPT: Economics

Below are my answers to your assignment

1. How financial intermediaries perform the function of reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risks are as follows;
They perform the function of reconciling conflicting preferences of lenders and borrowers by creating a market in two types of security, one for the lender and the other for the borrower… This implies that financial intermediaries are middle participants in the exchange of financial assets.
They spread and decrease risk by providing a platform where individuals with surplus cash can spread their risk by lending to several people rather than to only one individual. Lending to just one person comes with a higher level of risk. Depositing surplus funds with a financial intermediary allows institutions to lend to various screened borrowers. This reduces the risk of loss through default. The same risk reduction model applies to insurance companies. They collect premiums from clients and provide policy benefits if clients are affected by unforeseeable events like accidents, death, and disease.

2. The benefits of commercial bank consolidation are:
Reduced costs – When banks consolidate, they reduce their operating costs which ultimately should reflect in the fees charged to customers. One of the major costs for banks is the regulatory compliance. As banking becomes increasingly regulated, bank owners, as well as their boards of directors and senior management understand that regulatory compliance is one of their biggest and costly challenges.
Quality of services – When banks combine their services, they also consolidate their resources and talents which ultimately improve the quality and efficiency of services.
Less passwords to manage – Bank consolidation can occur voluntarily or involuntarily by consumers.
Speed of bill payment – It is not difficult to also expect and observe faster processing of payments made from our checking account to pay our bills as more often the accounts owned by one company perform inter-account transactions.

3. Risks faced by banks are as follows:
Operational Risk: This refers to any risk incurred as a result of failure in people, internal processes and policies, and systems. Common examples of operational risk in banks include service interruptions and security breaches.
Market Risk: Also known as systematic risk, market risk refers to any losses resulting from changes in the global financial market. Sources of market loss include economic recessions, natural disasters, political unrest, and changes in interest.
Liquidity Risk: This refers to a bank’s inability to meet its obligations, thereby jeopardizing its financial standing or even its very existence.
Compliance Risk: Any risk incurred as a result of failure to comply with federal laws or industry regulations..
Reputational Risk: As its name implies, reputational risk refers to any potential damage to a bank’s brand or reputation.
Credit Risk: Retail banks take a credit risk any time they lend money to a borrower without a guarantee that the borrower will be able to repay their loan.
Business Risk: This refers to any risk that stems from a bank’s long-term business strategy and affects the bank’s profitability.

4.
Dear president, below are reasons why AMCON should continue to exist as a corporation.
They positively assist the economy of Nigeria by;
* Complementing the recapitalization of affected Nigerian banks
* Providing an opportunity for the banks to sell off non performing loans
* Freeing up valuable resources and enabling banks focus on their core activities
* To get banks lending again

JOSEPH RUTH TOCHUKWU
2018/245132
ECONOMICS DEPARTMENT

QUIZ 3

1.Banks reconcile conflicting preference between lenders and borrowers by creating other platforms or products. They understand that a savings account in the Nigeria setting is not really a savings account. For instance, the criteria for receiving an interest on savings is that one must not withdraw more than three times in a month,but most times we lose count of how many times we make withdrawals from our savings account. So to resolve this issue,banks create other platforms. A fixed deposit account is an example. Once a customer’s money is in a fixed deposit account,he won’t be able to withdraw it till the stipulated time,and when the customer withdraws before the stipulated time,he is charged,so customer is losing by using his money before the agreed time.
Also, there are programs where the bank promises a certain percentage of interest if a customer saves a particular amount with the bank. So this way,the bank would have enough funds to lend out.
Financial intermediaries also provide the benefit of reducing costs on several fronts. For instance, they have access to economies of scale to expertly evaluate the credit profile of potential borrowers and keep records and profiles cost effectively. Last, they reduce the costs of the many financial transactions an individual investor would otherwise have to make if the financial intermediary did not exist.
2. A general consensus on the definition is that consolidation is a policy strategy designed to enhance commercial banks’ performance through an increase in their capital base either by means of mergers, recapitalization or by means of absorption
proponents of recapitalization and consolidation believes that increase in size could potentially increase bank returns through revenue gains as well as at the same time, reducing industry risk through the elimination of weak banks in the system.
bank consolidation reduces the level of insolvency risk since it results to asset diversification.
Somoye (2008) conducted a study on the performance of commercial banks in post consolidation era and pointed that consolidation in the banking sector can go a long way to create better opportunities for banks especially in the area of diversification.
3. Credit Risks
Credit risk is the risk that arises from the possibility of nonpayment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category.
Often times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and businesses that are not likely to run out of income over the period of the loan. Credit rating agencies provide adequate information to enable the banks to make informed decisions in this regard.
Market Risks
Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks.
In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.
Operational Risks
Operational risk occurs as the result of a failed business processes in the bank’s day to day activities. Examples of operational risk would include payments credited to the wrong account.
Operational risks arise mainly because of hiring the wrong people or alternatively they could also occur if there is a breakdown of the information technology systems. A lapse in the internal processes being followed could also lead to catastrophic errors.
Liquidity Risk
Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money.
Modern day banks are not very concerned about liquidity risk. This is because they have the backing of the central bank. In case there is a run on a particular bank, the central bank diverts all its resources to the affected bank. Therefore, the depositors can be paid back when they demand their deposits.
Reputational Risk
Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business.
Banks can save their reputation by ensuring that they never participate in any unfair or manipulative business practices. Also, banks need to continuously ensure that their public relations efforts project them as a friendly and honest bank.
Systemic Risk
Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.
The very nature of banking system therefore makes them prone to systemic risks. Systemic risks do not affect an individual bank rather they affect the entire system. Hence, there is very little that an individual bank can do to protect itself in the event that such a risk materializes.
4. AMCON should continue to exist as a Corporation because the number of bad debt is increasing. The economy is currently in recession, and obviously, during recession, businesses have issues and only a few pick up. The incidences of nonperforming loans are increasing and the issue of personalities that took those loans has not been addressed. There is need to address that. However,there is no template that guarantees that a loan cannot go bad, but professionals would have seen the signals or elements that can make a loan bad. You just don’t wake up one day and the loan has gone bad. How were the loans secured? What were the collaterals? What was the cash flow used for? Was the credit policy followed? Unless and until you make the credit officers responsible, the incidences of bad loans would continue to be there with us, although CBN is struggling and trying to ensure that it remains within the threshold of five per cent, and it’s possible but difficult.

■Assignment (1)

FUNCTIONS/ROLES OF FINANCIAL INTERMEDIARIES IN THE DEVELOPMENT OF AN ECONOMY
Financial intermediaries facilitate and foster economic growth and development of a nation. They
provide the needed funds to boast productive activities, which increase aggregate output and enhance
economic growth. Transferring savings from the surplus economic unit (i.e. those who ultimately use them
for investments or consumption) helps to stimulate the economy for wealth creation. Financial
intermediaries vigorously seek to attract surplus funds or reservoir of idle funds to channel same to
households, business/entrepreneurs and government for investment purposes.
The developmental functions are discussed specifically below:
i. Mobilization and Redistribution of savings for investment in the economy. Financial intermediaries
facilitate economic development by mobilizing and redistributing savings to their most efficient
use. In all sectors of the economy, there are two economic units – the surplus economic unit
(lenders) and the deficit economic unit (borrowers). Financial intermediaries mobilize savings from
savers or surplus spending units and repackage them as short, medium and long term loans for sale
to borrowers or deficit spending units. The packaging of savings involves four intermediation
functions: maturity intermediation, liquidity intermediation, size/denominational intermediation,
and risk intermediation.
a. Maturity Intermediation involves satisfying the borrowers need for long term funds as well as the
lenders need for liquidity. Financial intermediaries also provide market for the sales of second-hand
securities for investors that invested in long-term securities (such as equity shares and bonds) who
may want liquidity.
b. Liquidity Intermediation: Financial intermediaries despite the short duration of savings and the longterm
nature of the loans granted, banks still ensure liquidity to meet customers request on demand.
c. Size/Denomination Intermediation: Financial intermediaries accept both small and large deposits from
customers and loan it to investors for investment purposes.
d. Risk Intermediation: Financial intermediation accept deposits with different risk elements to form a
portfolio of loanable funds for investors. By making the loan available to diverse borrowers of various
sizes, the lending risks are minimized.
ii. Manpower Development and Employment Generation: The business of financial intermediation
requires skilled high-level manpower. Financial intermediaries recognising this, play active role in
training and retraining of staff both on-the-job and off-the-job training. This training equipped the staff
to meet the challenges in the industry and also create more employment opportunities. Financial
intermediaries also liaise closely with institutions of higher learning in the country in the production of
personnel through scholarship and provision of infrastructure such as books and e-learning facilities.
The central bank together with all licensed banks (under the auspices of the Bankers‟ Committee
established the Financial Institutions Training Centre (FITC) in 1982. The objectives of the FITC
include among others:
a. To carry on the business of training and education of persons employed or to be employed by the banks
and other financial institutions.
b. To protect, promote and advance the knowledge of banking and finance throughout Nigeria by
organizing seminars, lectures, workshops and other practical and theoretical courses.
Financial intermediaries fund employment generating activities by providing loans to young
entrepreneurs, medical and engineering graduates, and other technically trained persons to establish
their own businesses thereby generating employment, developing human capital and encouraging
entrepreneurial activity in Nigeria.
iii. Financing and Sustaining Economic Growth and Development. Financial intermediaries influence long
term economic growth and development through financing, investment, and advisory services. Financial
intermediaries ensure that there is high level of savings mobilization system, allocation mechanism to
the preferred sectors, and sustenance of credit delivery activity in the sectors. The preferred sector may
include: agriculture, small-scale industries, the rural sectors, exports and manufacturing. Thus, financial
intermediaries directly or indirectly enhance high level of productivity (high level of aggregate output),
encourage growth of indigenous industries and small-scale businesses, generate employment and
increase the per capita income of citizens in the economy.
iv. Poverty Alleviation and Financial Inclusion of Rural Populace. Financial intermediaries are agents of
poverty reduction. Extending banking facilities to rural areas inculcate banking habits in the rural areas
of the Nigeria economy. The idle funds in the area are mobilized and allocated to needy investors in the
area, which enhance economic growth and development of the area. According to Onaolapo, (2015),
„bringing financial services to the rural sector and packaging it in such a way that can be accessed by
the rural area is an pre-requisite for poverty reduction, employment creation, social cohesion and overall
economic development for Nigeria‟.
v. Facilitation and Development of money and capital markets. Financial intermediaries, specifically,
commercial banks and merchant banks facilitate the operation and development of money and capital
markets by encouraging capital formation investment and e-trading activities. These banks engage in
brokerages services for their customers in the process, perform, the functions of issuing houses.
vi. Development of International Trade: Financial intermediaries, particularly, commercial banks and
merchant banks are in one way or the other involved in financing of international trade and payments on
behalf of their clients. This functions are performed in a number of ways including bills for collection,
bill for negotiation, documentary credit and open account (Adekanya, 1986)
vii. Corporate Responsibility: Financial intermediaries owe some basic responsibility to their host
communities. Apart from the traditional function, which they render in the form of financial
intermediation to efficiently deliver to retain the confidence of their clients, they must sufficiently be
responsible to the needs of the host communities. Financial intermediaries perform this function by
providing infrastructural facilities, scholarship awards, and employment quota.
viii.Risk Avoidance and Management: Financial intermediaries provide strong safe for safe-keeping of
valuable assets to avoid risk associated with possible loss, injury, damage or peril, which the customer
could have been exposed to. They render financial advisory services to clients and educate them on the
risk-return trade-off of proposed businesses, use of hedging devices to minimise risks, administrative
efficiency in credit policy implementation, investment portfolio to reduce market risks and money rate
risks, adequate internal control measure and avoidance of risky exposures.
Specifically, insurance companies encourage business and economic growth by insuring
calculated risks of businesses. The primary function of insurance is to ensure that the financial losses of
an individual or business are fairly and equitably distributed over the insured community.

■Assignment (2)

CBN has since 2002 adopted a medium term monetary policy framework to free monetary policy implementation from the problem of time inconsistency and minimize over-reaction due to temporary shocks. However, periodic amendments are made to the Policy Guidelines in the light of developments in the financial markets and performance of the economy during the period under review. Thus, in 2005 some new reforms were introduced as �amendments and addendum� to the 2004/2005 monetary policy circular No. 37. These include:

Exchange Rate Band (of +/-3.0%)
Under the West African Monetary Zone Exchange Rate Mechanism (ERM) arrangement, member countries are required to maintain a band of +/-10.0 %. However, given the appreciable level of external reserves and the relative stability of the naira exchange rate which were achieved in 2004; the CBN shall seek to maintain a narrower band of +/- 3.0% during the course of 2005.

Interest Rate Policy
Over the years, the spread between banks� deposit and lending rates has remained unacceptably wide with adverse implications for savings mobilization and investment promotion. With the declining trend in the rate of inflation, there is no justification why the MRR should be currently fixed at 15.0%, when the year-on-year inflation rate for December 2004 was about 9.5%. The CBN is moving to a regime of more active monetary policy, with decisions on interest rate regime reviewed every quarter. The CBN shall henceforth, anchor its Minimum Rediscount Rate (MRR), on the year-on-year inflation rate adjusted for seasonality, which reflects the current fundamental policy changes in the economy; as opposed to the traditional practice of anchoring the MRR on the 12 month moving average rate of inflation, which reflects both current and past policy errors.

Wholesale Dutch Auction Forex Market (DAS)
In order to deepen the foreign exchange market and ensure sustained exchange rate stability, the CBN will establish a framework and guidelines for the introduction of a wholesale Dutch Auction System after the successful completion of the recapitalization and consolidation of the banking industry by end-December, 2005. Also the CBN will ensure the installation of requisite infrastructure to monitor banks� open position for the effective implementation of the DAS. It is envisaged that the introduction of a Wholesale Dutch Auction System will not only deepen the forex market, but will also assist in the convergence of the DAS and the interbank exchange rates and eliminate rent-seeking behaviour by the authorized dealers.

National Savings Certificate
To enhance liquidity management and ensure monetary stability, the National Savings Certificate (NSC), will be launched in 2005. It is expected that the issuance of the NSC would encourage the growth of domestic savings, as well as address the problem of excess liquidity in the economy on a more sustainable basis.

Cash Reserve Requirement (CRR) –
Two Week�s Maintenance Period
The CRR will complement OMO in ensuring that excess liquidity in the banking system is minimized. The maintenance period of the CRR averaged 8 weeks in 2004. Consequently, it did not effectively serve the purpose for which it was intended. The existing ratio of 9.5% shall remain in force in 2005. However, the maintenance period shall be two weeks. The computation of the CRR will be based on each bank�s total deposit liabilities (i.e. demand, savings and time deposits of both private and public entities), certificates of deposit, and promissory notes held by non-bank public and other deposit items.

Public Sector Deposits
Consistent with its traditional function as the banker to the government, the withdrawal of public sector funds from deposit money banks to the CBN was initiated in 2004 to address the problem of excess liquidity in the banking system, and to encourage the banks to mobilize savings from traditional sources other than the public sector. Its brief implementation proved very effective in liquidity management. However, this measure was suspended because of the apparent mixed signals which it conveyed to the public at the beginning of the banking system recapitalization exercise. Depending on the liquidity condition in the banking system, the CBN may resort to this instrument for liquidity management in 2005.

Settlement/Clearing Banks
Seven (7) banks that meet the requirement for maintaining settlement account with the CBN were appointed and designated as �Settlement Banks� to perform clearing and settlement functions for other banks with effect from 1st April, 2004. Cognizant of the need to provide collateral commensurate with the volume and value of cleared items and the need to further enhance the settlement and clearing systems of the banking industry, the guidelines were reviewed in 2005.

■Assignment (3)

Banks are literally exposed to many different types of risks. A successful banker is one that can mitigate these risks and create significant returns for the shareholders on a consistent basis. Mitigation of risks begins by first correctly identifying the risks, why they arise and what damage can they cause. In this article, we have listed the major types of risks that are faced by every bank. They are as follows:

Credit Risks

Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category.

The moment a loan is made, a certain amount of money is appropriated to the provision account. Also, banks have started utilizing tools like structured finance to mitigate such risks. Securitization helps remove the concentrated risk from the bank’s books and diffuse it amongst the various investors in the capital markets. Credit derivatives like credit default swap have also come into existence to help banks survive in the event of a credit default.

Unpaid loans were, are and will always be a byproduct of conducting the banking business. Modern banks have realized this and are prepared to handle the situation without becoming insolvent until a catastrophic loss occurs.

Market Risks

Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets.

In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.

Operational Risks

Banks have to conduct massive operations in order to be profitable. Economies of scale work in the favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an extremely difficult task.

Operational risks arise mainly because of hiring the wrong people or alternatively they could also occur if there is a breakdown of the information technology systems. A lapse in the internal processes being followed could also lead to catastrophic errors. For instance, Barings Bank ended up bankrupt because of its failure to implement appropriate internal controls. One trader was able to bet so much in the derivatives market that the equity of Barings Bank was wiped out and the bank simply ceased to exist.

Moral Hazard

The recent bailout of banks by many countries has created another kind of risk called the moral hazard. This risk is not faced by the bank or its shareholders. Instead, this risk is faced by the taxpayers of the country in which banks operate. Banks have become accustomed to taking excessive risk. If their risk pays off, they get to keep the returns. However, if their risk backfires, then the losses are borne by taxpayers in the form of bailouts. This too big to fail model has caused banks to become reckless in their pursuit of profit. Although central banks are using audits to ensure that safe business practices are followed, banks nowadays indulge in risky business the moment they are not under regulatory oversight.

Liquidity Risk

Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.

Many modern day banks have faced bank runs. However, none of them have become insolvent due to a bank run post the establishment of central banks.

Business Risk

The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run.

Banks have no possible way to mitigate the risks that are created by following inappropriate business objectives. Which objectives were right and which were wrong? This question can only be answered in hindsight. When Lehman Brothers was focusing their resources on subprime lending, it must have seemed like the strategically right thing to do!

Reputational Risk

Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.

Banks can save their reputation by ensuring that they never participate in any unfair or manipulative business practices. Also, banks need to continuously ensure that their public relations efforts project them as a friendly and honest bank.

Systemic Risk

Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.

Thus, the management of banks requires a lot of skill since multiple types of risks need to be mitigated. Some of these risks can be avoided whereas for the others the best that banks can do is to minimize their damage.

■Assignment (4)

AMCON’s creation is still of good use to the government and the economy. I advise Mr. President to have it still upheld.

AMCON was created to be a key stabilizing and re-vitalizing tool established to revive the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy.

The Act establishing the body permits, as part of its operation to set aside a sinking fund with an annual ₦50 billion contribution by the Central Bank of Nigeria and 0.3% of total asset value of all the commercial banks over the useful life of the corporation. The money from this fund would be used to purchase FG securities and the returns from this investment will be returned to the account and then redistributed among the contributing commercial banks. The fund is administered by consortium of members from the participating banks which will be rotated annually to allow even participation among the participating banks. The House of Representatives of Nigeria in his submission in 2015, queried the excess debt accumulation by the body

Nwosu Sochima Anne
2018/242291
Eco 324
1.Among the cost advantages of using financial intermediaries include; reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risks. Discuss how financial intermediaries perform these functions in more details.
Answer
They Perform these functions in the following ways;
Firstly, they act as the middleman( A middleman is a broker, go-between, or intermediary to a process or transaction)between two parties in a financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund.
Secondly, financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. This implies that financial intermediaries are middle participants in the exchange of financial assets.
Thirdly by diversifying loan risks. The main objective for a lender diversifying a portfolio is minimizing exposure to any single borrower and reducing the risk of multiple borrowers defaulting in a specific industry or geographic region simultaneously. Financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.

2.The commercial banking consolidation initiated by CBN in June 2004 was aimed at strengthening the financial system. The exercise has been a huge success. The paid – up capital base of the bank was raised from N2billion to N25billion and many banks are now globally competitive. Clearly discuss the benefits of the consolidation and the failures (if any).
Answer
Benefits of debt consolidation
1. Repay debt sooner
Taking out a debt consolidation loan may help put you on a faster track to total payoff, especially if you have significant credit card debt. Credit cards don’t have a set timeline for paying off a balance, but a consolidation loan has fixed payments every month with a clear beginning and end to the loan.
2. Simplify finances
When you consolidate all of your debt, you no longer have to worry about multiple due dates each month because you only have one payment. Furthermore, the payment is the same amount each month, so you know exactly how much money to set aside.
3. Get lower interest rates
As of November 2021, the average credit card rate is around 16 percent. Meanwhile, the average personal loan rate is below 11 percent. Of course, rates vary depending on your credit score and the loan amount and term length, but you’re likely to get a lower interest rate with a debt consolidation loan than what you’re currently paying on your credit card.
4. Have a fixed repayment schedule
If you use a personal loan to pay off your debt, you’ll know exactly how much is due each month and when your very last payment will be. Pay only the minimum with a high interest credit card and it could be years before you pay it off in full.
5. Boost credit
While a debt consolidation loan may initially lower your credit score slightly since you’ll have to go through a hard credit inquiry, over time it will likely improve your score. That’s because it’ll be easier to make on-time payments. Your payment history accounts for 35 percent of your credit score, so paying a single monthly bill when it’s due should significantly raise your score.
Likely failures of debt consolidation
1. It won’t solve financial problems on its own
Consolidating debt does not guarantee that you won’t go into debt again. If you have a history of living beyond your means, you might do so again once you feel free of debt. To help avoid this, make yourself a realistic budget and stick to it. You should also start building an emergency fund that can be used to pay for financial surprises so you don’t have to rely on credit cards. 
2. There may be up-front costs
Some debt consolidation loans come with fees. These may include:
* Loan origination fees.
* Balance transfer fees.
* Closing costs.
* Annual fees.
Before taking out a debt consolidation loan, ask about any and all fees, including those for making late payments or paying your loan off early. Depending on the lender that you choose, these fees could be hundreds if not thousands of dollars. While paying these fees may still be worth it, you’ll want to include them in deciding if debt consolidation makes sense for you.
3. You may pay a higher rate
Your debt consolidation loan could come at a higher rate than what you currently pay on your debts. This could happen for a variety of reasons, including your current credit score.
“Consumers consolidating debt get an interest rate based on their credit rating. The more challenged the consumer, the higher the cost of credit,” says Michael Sullivan, personal financial consultant for Take Charge America, a nonprofit credit counseling and debt management agency.
4. Missing payments will set you back even further
If you miss one of your monthly loan payments, you’ll likely have to pay a late payment fee. In addition, if a payment is returned due to insufficient funds, some lenders will charge you a returned payment fee. These fees can greatly increase your borrowing costs.
Also, since lenders typically report a late payment to the credit bureaus after it becomes 30 days past due, your credit score can suffer serious damage. This can make it harder for you to qualify for future loans and get the best interest rate.
To reduce your chances of missing a payment, enroll in the lender’s automatic payment program if it has one.

3.The risks faced by banks are enormous, clearly discuss the risks and how they can be mitigated.
Answer
Some of these risks include;
Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities.
 Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra $50 bill to a customer.
On a larger scale, fraud can occur through breaching a bank’s cybersecurity. It allows hackers to steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make it more difficult to attract deposits or business in the future.
 Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
 Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.
In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.

4.Assuming you are the current CBN governor and Mr. President tells you to write a position paper and justify why AMCON should continue to exist as a Corporation, what will you tell Mr. President.
Answer
The fundamental objectives for the establishment of AMCON was to help commercial banks and strategic businesses in Nigeria from the collapse in the aftermath of the global financial crises of 2008 through acquisition of non-performing loans and to dispose of the underlying assets in the most profitable manner. These are their main objectives and that’s why they should continue to exist as a corporation..

Okpara Favour Amarachi
2018/248953
favouramy363@gmail.com

1.Reconciling conflicting preferences of lenders and borrowers- When using a financial intermediary one tends to have lower search costs as they don’t have to find the right lenders, you leave that to a specialist.
Risk aversion- intermediaries help spread out and decrease the risks.Rather than lending to just one individual, you can deposit money with a financial intermediary who lends to a variety of borrowers – if one fails, you won’t lose all your funds.Economies of scale -using financial intermediaries reduces the costs of lending and borrowing. A bank can become efficient in collecting deposits, and lending. This enables economies of scale – lower average costs. If you had to seek out your own saving, you might have to spend a lot of time and effort to investigate best ways to save and borrow.

2).Benefits Of The Banking Consolidation

Some of the benefits of the consolidation of the banking industry include availability of
funds for the small and medium scale enterprises, opportunity for Nigerian banks to
explore other regional and international markets, reduction in capital flight, massive and
continuous innovations in the banking sector, externally-focused competition and
restoration of confidence in the Nigerian banking sector etc. Izedonmi (2005) has argued
that the consolidation of Nigerian banks was to make them Basel Accord II compliant by
2007. Basel II emphasized the need for banks to have a higher level of capital base which
is proportional to their risk exposure. Since the consolidation, many banks have gone to
the capital market to raise additional capital for various purposes such as expansion,
enhancement of operational efficiency through investment in ICT. Okoro (2006)
remarked that “never in the country’s history has anything near the inflow of off-shore
investment of over $500 million through the banking sector been registered in one year”.
Equally, the bond and repurchase market are expected to kick off due to the growth in
the banking sector (Teriba 2004). Ifeacho (2005) argued that the Nigerian capital market
had suddenly become the preferred source of raising funds by banks in the wake of the
consolidation policy, thereby boosting the market capitalization in tremendous leaps.
Again, while consolidation increased attention in the primary market, activities in the
secondary market became lull initially because of new issues offered by banks (Atufe
2005).

3. RISKS FACED BY BANKS

i). Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading.

ii). Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.

iii).Market Risk
This risk mostly occur from bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.

iv). Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.

HOW TO MITIGATE THE RISKS
i.Document the rationale for loan upgrades. Linda Keith CPA, whose firm trains business lenders in credit analysis, says bankers should be careful to document the thinking behind their judgment that a loan should be upgraded for purposes of the allowance for loan and lease losses (ALLL). “It’s important to eliminate regulator guesswork,” she says. It’s also important, she says, for financial institutions to verify that guidelines for analyzing a potential upgrade are “clear, clearly communicated to, and consistently followed.

ii.Don’t be afraid to uncover vulnerabilities: stress testing is positive in that it enables financial institutions to gauge their potential vulnerability to exceptional but plausible adverse events. “Stress testing should assess and quantify your institution’s vulnerabilities under multiple unfavorable scenarios,” he says. “Once the potential downside is understood, you can take steps to reduce or mitigate those risks, or you can ensure you have sufficient capital to manage those risks.”

iii.Develop a successful stress testing framework with three “knows.” Jack Gregory and Dave Keever, senior stress testing and credit experts for Crowe Horwath, say financial institutions looking to prepare and manage stress test forecasts need to know three key things: • The institution’s portfolio.

• The scenarios and their impact on the bank’s capital and liquidity.

• The forecasts including what they show and why.

Gregory and Keever’s presentation will also outline three lines of defense all institutions need for stress-test production.

iv. Set deadlines. “To make the year-end ALLL as efficient as possible, it is best to get as much work done as possible prior to year end,” says Mike Lubansky, director of consulting services at Sageworks. To do that, financial institutions should set hard deadlines for:

• Risk-rating changes.

• Charge-offs.

• Updating the core system to reflect the risk-rating changes.

4).It was as a result of the constant growth of loans, which were not performing in some banks within the Nigerian system, coupled with some problems, occasioned by solvency, as well as liquidity, including reasons why, it was necessary to put some measures in place with a view to facilitate the process of implementing the policy of restructuring Nigerian banking system was what led to the establishment of the Asset Management Company of Nigeria.
There was this preponderance of non performing loans in Nigerian bank, and it was so alarming in that, some actions were needed to be taken by the Central Bank of Nigeria to address the gap that was existed in non performing loans management. To achieve this, there was some requirements needed to ensure successful operation of the system.AMCON should continue to exist because it is very important for the government to put some measures in place with a view to facilitate the process of implementing the policy of restructuring Nigerian banking system.

Udumukwu Emmanuel Chibueze
2018/242302

1 A non-bank financial intermediary does not accept deposits from the general public. The intermediary may provide factoring, leasing, insurance plans, or other financial services. Many intermediaries take part in securities exchanges and utilize long-term plans for managing and growing their funds. The overall economic stability of a country may be shown through the activities of financial intermediaries and the growth of the financial services industry. Financial intermediaries move funds from parties with excess capital to parties needing funds. The process creates efficient markets and lowers the cost of conducting business. For example, a financial advisor connects with clients through purchasing insurance, stocks, bonds, real estate, and other asset

2
I. Reduced costs – When banks consolidate, they reduce their operating costs which ultimately should reflect in the fees charged to customers. One of the major costs for banks is the regulatory compliance. As banking becomes increasingly regulated, bank owners, as well as their boards of directors and senior management understand that regulatory compliance is one of their biggest and costly challenges. Although small community banks are not the intended targets of banking regulations, they must still comply with dozens of regulations. Therefore, from a banking management standpoint, consolidation makes sense to reduce the costs and efforts associated with regulatory compliance which ultimately results in one of the bank consolidation benefits for consumers. Of course, there are many other areas where consolidation also helps reduce costs such as systems, offices, people, and devices

II. Quality of services – When banks combine their services, they also consolidate their resources and talents which ultimately improve the quality and efficiency of services.

III. Less passwords to manage – Bank consolidation can occur voluntarily or involuntarily by consumers. Our accounts can be consolidated under one company as a result of mergers and acquisitions or we can consciously select and consolidate accounts and credit cards managed by one company. Either way, as consolidation occurs, we can set up our accounts to be accessed from one web site for online account monitoring. Identity theft management is also one of the main bank consolidation benefits to consumers.

3. When handling our money, the three largest risks banks take are credit risk, market risk and operational risk.

People and companies who fail to pay back their debts pose the largest risk to banks. When lending money to someone, there’s always a chance they won’t pay you back. This is credit risk.
Banks have ways of reducing this risk. When you apply for a loan, the lender will look at what’s known as the five C’s: credit history, capacity, collateral, capital and conditions.
* Credit history, also known as character, is basically your track record for repaying debts.
* Capacity refers to your ability to repay a loan by looking at your job stability and your debt compared to your income, known as the debt-to-income ratio.

investment banks are particularly exposed to risks from changes in financial markets. This is because they hold more financial assets such as shears and bonds for themselves and their customers.
Market risk can for example come from a change in interest rates, the price of a good or the exchange rate of a currency. Banks that have bought shares in an oil company will for example lose money, if global oil prices suddenly go down.

l banks are to an extent vulnerable to human errors or mistakes. In business terms, this is called operational risk. It comes from the losses a bank might make from bad internal processes, people or external events. This could for example be confidential information getting leaked or a badly judged decision by an employee.
The losses from operational risk can be huge. British banks have had to pay around £30 billion for mis-selling payment protection insurance
(PPI) over the last decade. Customers were sold the insurance despite in many cases not being eligible for or needing it. It was designed to cover debt repayments in certain circumstances when the customer was unable to pay, for example because of illness, losing their job or death.
Of course then Arnold Schwarzenegger came along.

4. The fundamental objectives for the establishment of AMCON was to rescue commercial banks and some underlying strategic businesses in Nigeria from the brink of collapse in the aftermath of the global financial crises of 2008 through acquisition of non-performing loans and to dispose of the underlying assets in the most profitable manner

Economics
2018/245647
Answers
1: A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities having a surplus of funds (savers) to those running a deficit of funds (borrowers). with increasing access to funds, through their ability to aggregate funds, intermediaries also reduce the transaction and search costs between lenders and borrowers.
By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital. Through diversification of loan risk, financial intermediaries are also able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor money’s or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
2:Greater efficiency and cost effectiveness
-Enhanced ability to compete in the market place,both domestically and internationally
– Diversification of operations,control risk and provision of broad array of products
– increased convenience was archived,also. Access of information,speed of transactions and enhanced control and management of resources. -The latest recapitalisation of commercial banks in Nigeria has resulted into massive retrenchment of experienced banks’ employees. The trade unionism in the industry was weak, as such no organised labour could fight for the interests of displaced employees (Inyang, Enuoh, & Ekpenyong, 2014). Rather than collectivism, individualism was more pronounced in the Nigerian banking industry. …
-Rather than collectivism, individualism was more pronounced in the Nigerian banking industry. Coupled with the fact that the Nigerian Labour Law was inadequately implemented, many employers of labour infringed on workers’ rights on a daily basis (Idowu, 2013;Inyang et al., 2014). Conversely, there were high demands for fresh graduates in the Nigerian banking industry.
-The latest recapitalization of commercial banks in Nigeria has resulted into massive retrenchment of experienced banks.
3: Credit Risks
A) Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category.
Most times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and businesses that are not likely to run out of income over the period of the loan. Credit rating agencies provide adequate information to enable the banks to make informed decisions in this regard.
The profitability of a bank is extremely sensitive to credit risks. Hence, even if credit risk rises by a small amount, the profitability of the bank can get extremely impacted. Therefore, to deal with such risks banks have come up with a wide variety of measures. For instance, banks always hold a certain amount of funds in reserves to mitigate such risks.
The moment a loan is made, a certain amount of money is appropriated to the provision account. Also, banks have started utilizing tools like structured finance to mitigate such risks. Securitization helps remove the concentrated risk from the bank’s books and diffuse it amongst the various investors in the capital markets. Credit derivatives like credit default swap have also come into existence to help banks survive in the event of a credit default.
Unpaid loans were, are and will always be a byproduct of conducting the banking business. Modern banks have realized this and are prepared to handle the situation without becoming insolvent until a catastrophic loss occurs
B) Market Risks
Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets.
Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real estate which exposes them to commodity risks as well.
In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.
C) Operational Risks
Banks have to conduct massive operations in order to be profitable. Economies of scale work in the favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an extremely difficult task.
Operational risk occurs as the result of a failed business processes in the bank’s day to day activities. Examples of operational risk would include payments credited to the wrong account or executing an incorrect order while dealing in the markets. None of the departments in a bank are immune from operational risks.
Operational risks arise mainly because of hiring the wrong people or alternatively they could also occur if there is a breakdown of the information technology systems. A lapse in the internal processes being followed could also lead to catastrophic errors. For instance, Barings Bank ended up bankrupt because of its failure to implement appropriate internal controls. One trader was able to bet so much in the derivatives market that the equity of Barings Bank was wiped out and the bank simply ceased to exist.
D) Moral Hazard
The recent bailout of banks by many countries has created another kind of risk called the moral hazard. This risk is not faced by the bank or its shareholders. Instead, this risk is faced by the taxpayers of the country in which banks operate. Banks have become accustomed to taking excessive risk. If their risk pays off, they get to keep the returns. However, if their risk backfires, then the losses are borne by taxpayers in the form of bailouts. This too big to fail model has caused banks to become reckless in their pursuit of profit. Although central banks are using audits to ensure that safe business practices are followed, banks nowadays indulge in risky business the moment they are not under regulatory oversight.
E) Liquidity Risk
Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.
Modern day banks are not very concerned about liquidity risk. This is because they have the backing of the central bank. In case there is a run on a particular bank, the central bank diverts all its resources to the affected bank. Therefore, the depositors can be paid back when they demand their deposits. This restores depositor’s confidence in the banks finances and the run on the bank is averted.
Many modern day banks have faced bank runs. However, none of them have become insolvent due to a bank run post the establishment of central banks.
F) Business Risk
The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run.
Hence, there is always a risk that a given bank may choose the wrong strategy. As a result of this wrong choice, the bank may suffer losses and end up being acquired or may simply collapse. Consider the case of banks such as Washington Mutual and Lehman Brothers. These banks chose the subprime route to growth. Their strategy was to be the preferred lender to people who have less than perfect credit scores. However, the whole area of subprime lending went bust and since these banks had heavy exposures to such loans, they suffered dire consequences too.
Banks have no possible way to mitigate the risks that are created by following inappropriate business objectives. Which objectives were right and which were wrong? This question can only be answered in hindsight. When Lehman Brothers was focusing their resources on subprime lending, it must have seemed like the strategically right thing to do!
G) Reputational Risk
Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.
Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business. For instance Citibank was recently viewed as manipulating the Forex rates via conducting false trades with its own trading partners. When regulators found out about Citibank’s predatory tactics, they levied huge fines on the bank.
Apart from the fines Citibank also lost reputation as a bank that follows fair trade practices when the customers found out that they tend to resort to market manipulation. Many prospective customers may have shifted their business away from Citibank as a result of this discovery causing monetary loss as a result of reputation loss.
Banks can save their reputation by ensuring that they never participate in any unfair or manipulative business practices. Also, banks need to continuously ensure that their public relations efforts project them as a friendly and honest bank.
H) Systemic Risk
Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.
They have to write off certain assets as a result of the failure of their counterparty. This writing off often leads to the bankruptcy of other banks and an unstoppable domino seems to take over. Systemic risk is an extremely bad scenario to be in. For instance when the subprime crisis happened in 2008, it seemed like the entire global financial system would collapse.
The very nature of banking system therefore makes them prone to systemic risks. Systemic risks do not affect an individual bank rather they affect the entire system. Hence, there is very little that an individual bank can do to protect itself in the event that such a risk materializes.
Thus, the management of banks requires a lot of skill since multiple types of risks need to be mitigated. Some of these risks can be avoided whereas for the others the best that banks can do is to minimize their damage.
4) To positively impact and improve the economy of Nigeria by;Complementing the recapitalization of affected Nigerian banks;
Providing an opportunity for banks to sell off Non Performing Loans(NPLs);
Freeing up valuable resources and enabling banks focus on their core activities.
To propel the lending ideology in banks again.

Obeta Princess Oluchi
2018/242409
Economics Department

1. As we know, financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities having a surplus of funds (savers) to those running a deficit of funds (borrowers). with increasing access to funds, through their ability to aggregate funds, intermediaries also reduce the transaction and search costs between lenders and borrowers.
By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital. Through diversification of loan risk, financial intermediaries are also able to avert risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor money’s or demand deposits, these intermediaries are able to convert short-term liabilities to assets of different maturities.

2. The Benefits
Greater efficiency and cost effectiveness
-Enhanced ability to compete in the market place,both domestically and internationally
– Diversification of operations,control risk and provision of broad array of products
– increased convenience was archived, also access of information,speed of transactions and enhanced control and management of resources.
Failures
-The latest recapitalisation of commercial banks in Nigeria has resulted into massive retrenchment of experienced banks’ employees. Rather than collectivism, individualism was more pronounced in the Nigerian banking industry. …
-Rather than collectivism, individualism was more pronounced in the Nigerian banking industry. Conversely, there were high demands for fresh graduates in the Nigerian banking industry.
-The latest recapitalization of commercial banks in Nigeria has resulted into massive retrenchment of experienced banks.

3. Credit Risks
Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category.

Often times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and businesses that are not likely to run out of income over the period of the loan. Credit rating agencies provide adequate information to enable the banks to make informed decisions in this regard.

The profitability of a bank is extremely sensitive to credit risks. Hence, even if credit risk rises by a small amount, the profitability of the bank can get extremely impacted. Therefore, to deal with such risks banks have come up with a wide variety of measures. For instance, banks always hold a certain amount of funds in reserves to mitigate such risks.

The moment a loan is made, a certain amount of money is appropriated to the provision account. Also, banks have started utilizing tools like structured finance to mitigate such risks. Securitization helps remove the concentrated risk from the bank’s books and diffuse it amongst the various investors in the capital markets. Credit derivatives like credit default swap have also come into existence to help banks survive in the event of a credit default.

Unpaid loans were, are and will always be a byproduct of conducting the banking business. Modern banks have realized this and are prepared to handle the situation without becoming insolvent until a catastrophic loss occurs

.Market Risks
Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets.

Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real estate which exposes them to commodity risks as well.

In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.

Operational Risks
Banks have to conduct massive operations in order to be profitable. Economies of scale work in the favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an extremely difficult task.

Operational risk occurs as the result of a failed business processes in the bank’s day to day activities. Examples of operational risk would include payments credited to the wrong account or executing an incorrect order while dealing in the markets. None of the departments in a bank are immune from operational risks.

Operational risks arise mainly because of hiring the wrong people or alternatively they could also occur if there is a breakdown of the information technology systems. A lapse in the internal processes being followed could also lead to catastrophic errors. For instance, Barings Bank ended up bankrupt because of its failure to implement appropriate internal controls. One trader was able to bet so much in the derivatives market that the equity of Barings Bank was wiped out and the bank simply ceased to exist.

Liquidity Risk
Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.

Modern day banks are not very concerned about liquidity risk. This is because they have the backing of the central bank. In case there is a run on a particular bank, the central bank diverts all its resources to the affected bank. Therefore, the depositors can be paid back when they demand their deposits. This restores depositor’s confidence in the banks finances and the run on the bank is averted.

Many modern day banks have faced bank runs. However, none of them have become insolvent due to a bank run post the establishment of central banks.

Business Risk
The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run.

Hence, there is always a risk that a given bank may choose the wrong strategy. As a result of this wrong choice, the bank may suffer losses and end up being acquired or may simply collapse. Consider the case of banks such as Washington Mutual and Lehman Brothers. These banks chose the subprime route to growth. Their strategy was to be the preferred lender to people who have less than perfect credit scores. However, the whole area of subprime lending went bust and since these banks had heavy exposures to such loans, they suffered dire consequences too.

Banks have no possible way to mitigate the risks that are created by following inappropriate business objectives. Which objectives were right and which were wrong? This question can only be answered in hindsight. When Lehman Brothers was focusing their resources on subprime lending, it must have seemed like the strategically right thing to do!

Reputational Risk
Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.

Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business. For instance Citibank was recently viewed as manipulating the Forex rates via conducting false trades with its own trading partners. When regulators found out about Citibank’s predatory tactics, they levied huge fines on the bank.

Apart from the fines Citibank also lost reputation as a bank that follows fair trade practices when the customers found out that they tend to resort to market manipulation. Many prospective customers may have shifted their business away from Citibank as a result of this discovery causing monetary loss as a result of reputation.

The very nature of banking system therefore makes them prone to systemic risks. Systemic risks do not affect an individual bank rather they affect the entire system. Hence, there is very little that an individual bank can do to protect itself in the event that such a risk materializes.

Thus, the management of banks requires a lot of skill since multiple types of risks need to be mitigated. Some of these risks can be avoided whereas for the others the best that banks can do is to minimize their damage.

4. The Asset Management Corporation of Nigeria (AMCON) was established by an Act of the National Assembly on July 19th 2010, primarily to resolve the nations banking sector crisis and restore stability to its economy. It seeks to do so by purchasing Non-Performing Loans from eligible financial institutions and effectively managing or disposing of them. However, the issue arises from the fact that the Act grants notably wide and novel powers in its bid to achieve its objects. This consequently results in significant legal implications on the key players involved, particularly legal practitioners, the judiciary, eligible financial institutions and even debtors.

From the explanations above, I think AMCON should continue to exist because of what it aims to achieve

Name: Ugwuoke Godwin Izuchukwu
Reg no: 2018/249529
Department: Economics

1.
Reconciling conflicting preferences of lenders and borrowers- When using a financial intermediary, one tends to have lower search costs as they don’t have to find the rightlenders, you leave that to a specialist; the bank. Like in the case of batter system,finding someone that needs exactly what you want and needs exactly what you have is a problem. The financial intermediaries have put an end to this problem by providing a link between the lenders and borrowers.
Risk aversion- intermediaries help spread out and decrease the risks.Rather than lending to just one individual, you can deposit money with a financial intermediary who lends to a variety of borrowers – if one fails, you won’t lose all your funds

2.
Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.

While banks cannot be fully protected from credit risk due to the nature of their business model, they can lower their exposure in several ways. Since deterioration in an industry or issuer is often unpredictable, banks lower their exposure through diversification.

By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. To lower their risk exposure, they can loan money to people with good credit histories, transact with high-quality counterparties, or own collateral to back up the loans.

Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra $50 bill to a customer.

On a larger scale, fraud can occur through breaching a bank’s cybersecurity. It allows hackers to steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make it more difficult to attract deposits or business in the future.

Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.

Commodity prices also play a role because a bank may be invested in companies that produce commodities. As the value of the commodity changes, so does the value of the company and the value of the investment. Changes in commodity prices are caused by supply and demand shifts that are often hard to predict. So, to decrease market risk, diversification of investments is important. Other ways banks reduce their investment include hedging their investments with other, inversely related investments.

Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.

Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers. Mismanagement of asset-liability duration can also cause funding difficulties. This occurs when a bank has many short term liabilities and not enough short-term assets.

Short-term liabilities are customer deposits or short-term guaranteed investment contracts (GICs) that the bank needs to pay out to customers. If all or most of a bank’s assets are tied up in long-term loans or investments, the bank may face a mismatch in asset-liability duration.

Regulations exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid assets to survive for a period of time even without the inflow of outside funds.

3.
The need to achieve a strong and stable financial system for the Nigerian economy largely informed the programme of reforms introduced in the banking sector by the Central Bank of Nigeria. The major crux of the reforms was the consolidation programme carried out by the CBN, which programme fundamentally altered the makeup of the banking institutions operating in Nigeria. Commenting on the issue, the Governor of the Apex Bank stated: Consolidation of Nigeria’s banking industry is not only critical to the health of the financial system, but also consistent with the framework of the National
Economic Empowerment and Development Strategy (NEEDS). Indeed, bank consolidation has been recognized in both the developed and developing economies, as a veritable strategy for deepening the financial system and growing the economy.
The basic essence of the programme of consolidation was the creation of viable and stable banks with very solid asset bases that could function and compete effectively while still maintaining a safe financial environment for the customers’ deposits. In the course of the consolidation, the banks that successfully weathered the storm by way of shoring up their minimum share capital did not have any problem. In the same vein, the customers of such banks did not experience any problem with their deposits and the services supplied by their banks.

4.
AMCON’s role has been a risk-transfer or risk-sharing partnership. And in a way, this has been a good thing for the market, depending on who is asked. The establishment of the Act and AMCON was necessitated by the financial market crash of 2008 and the concomitant defaults in the banking system. When viewed from this perspective, one can argue that AMCON has helped sanitise the process of loan origination in Nigerian banks. Previously, banks did not take careful consideration of the quality of the loans written on their books, so long as borrowers guarantee interest payments and the loan principal. Now, Nigerian banks are even more conservative regarding the loans they originate, and are seeing default levels at perhaps its lowest since 2008. By having AMCON absorb most of those bad loans on the books of the banks, the banks were freed to continue lending and maintain quality loans of their portfolio, invariably reducing their risk-weighted assets. And since AMCON is a specialised institution, it can acquire the burden of debt recovery or agree to restructuring some of these loans, without adversely affecting the banking system.

NAME: UNADIKE FABIAN CHIMEMEZU
REG NO: 2018/249698
DEPARTMENT: ECONOMICS
COURSE TITLE: THE FINANCIAL SYSTEM
COURSE CODE: ECO 324
ASSIGNMENT
1. Among the the cost advantages of using financial intermediaries include; reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risks. Discuss how financial intermediaries perform these functions in more details.
2. The commercial banking consolidation initiated by CBN in June 2004 was aimed at strengthening the financial system. The exercise has been a huge success. The paid – up capital base of the bank was raised from N2billion to N25billion and many banks are now globally competitive. Clearly discuss the benefits of the consolidation and the failures (if any).
3. The risks faced by banks are enormous, clearly discuss the risks and how they can be mitigated.
4. Assuming you are the current CBN governor and Mr. President tells you to write a position paper and justify why AMCON should continue to exist as a Corporation, what will you tell Mr. President.

ANSWERS:
1. Financial intermediaries, all over the world play crucial roles in the development and growth of the economy. An economy is made up of fund raisers and fund suppliers. Financial intermediaries are those institutions in the financial market that mediate between the fund raisers and the fund suppliers. They carry out intermediation between surplus and deficit units of the economy.

Role of Financial Intermediaries:
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use.
Financial intermediaries helps in reconciling conflicting preferences of lenders and borrowers by performing the following functions:
– Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
– Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
– Providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.
– Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
– Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.

2. The consolidation of the Nigerian banking system started after the announcement on July 6, 2004 by the Governor of the Central Bank of Nigeria to the Bankers’ Committee on banking sector reforms.The consolidation of the banking industry in Nigeria started in 2004 when the CBN mandated all banks to meet the N25billion minimum paid-up capital by 31st December, 2005
THE BENEFITS OF THE CONSOLIDATION
– Proponents of concentration theory argue that the banking consolidation promotes increased returns through revenue and cost efficiency gains. They aver that consolidation may also reduce industry risks by eliminating weak banks from the system and creating better opportunities for diversification.
– Immediately after the consolidation exercise of 2005, the number of banks in the country stood at 25. Shortly after that, there was a further merger of Inland Bank with First Altantic Bank Plc (FinBank Plc), in addition to another merger of Stanbic Bank Limited and IBTC Chartered Bank Plc (Stanbic-IBTC bank Plc). This made the number of banks in the country to reduce in number to 23 banks. Again, when Citibank Nigeria Limited came on board, the number of banks in the country had a slight increase to 24 banks.
– With subsequent mergers and/or acquisitions that took place between 2008 and 2013, in addition to the revocation of the operating licenses of three banks that failed to show the ability of recapitalising by a mandated deadline of 30th September, 2011 given by the Central Bank of Nigeria (CBN), the number of banks in Nigeria by the end of 2013 became 21.
Etc
I don’t really think there was any Failures though.

3. The Risks faced by Banks are:
A. Credit Risk:
One of the most significant threats faced by banks is credit risk. In simpler words, credit risk is defined as the inability of a borrower or a counterparty to meet the contractual obligations. In other words, when a borrower fails to pay the appropriate amount to the lender due to any financial crisis. The banks have suffered huge losses in the past from credit risks, and are still prone to such losses.
Although credit losses are primarily defined by the inability of the borrower to repay loans to the lenders, it also includes the delay in payments of the borrower. That means if any borrower does not make timely payments, then such types of cases also come under credit risks.
What Can Be Done?
Such types of losses commonly occur due to borrower insolvency. Hence, banks should conduct proper research before granting the loans and should only sanction loans to individuals and businesses that are not likely to run out of their income during the payment period.
B. Business Risk:
Business risks are a significant result of credit risk. To put it simply, when a bank fails to generate profits during a specific period, then it is called business risk. Many times, a business takes a loan from a bank and then fails to repay it. In such a scenario, the banks face losses due to business risk.
The result of business loss is either being acquired by some other banks, or collapse in big banks. Examples of such banks that suffered huge losses due to the wrong business strategy are Washington Mutual and Lehman Brothers.
What Can Be Done?
Although there are no sure-shot methods of eliminating the business risk, the adoption of the
right strategy might do the work.
C. Compliance Risk:
When a bank does not follow proper regulatory standards put down by the financial institutions, then such type of risk is known as Compliance risk. These are usually a not much greater risk but surely have some significant outcomes. When a bank does not comply with proper regulation formed by the banking institutions in their certain branch, then they face financial and legal losses.
The banks get severely affected by these losses and suffer loss in their daily banking targets. They had to bear legal penalties and might face significant challenges by the regulatory committee.
What Can Be Done?
To mitigate such types of risks, the banks should formulate, regulate, and manage all the regulations and compliance policies across all their branches.
D. Market Risk:
Market risks are defined as the risks involved in the fall of a company’s share or decrease in the value of the stock of third-party companies where the bank has invested. We all know that apart from sanctioning loans, the banks also hold a certain amount of shares in the market. In that case, if by any means, the share price of the banks decreases, then they will suffer huge losses, and these types of losses generally come under market risk.
The market risks can vary depending upon the type of commodity a bank holds. For instance, if a bank holds foreign exchange then they’re exposed to a Forex risk, in the case of gold, silver, or real estate, they are exposed to commodity risks, etc. similar is the case with equity risk.
What Can Be Done?
To mitigate market risks, banks usually leverage hedging contracts. They use contracts like forwards, options and swaps, and many more, to completely eliminate the various market risks.
E. Security Risk:
Now that’s a considerable risk that has been on the top of the list for the global market, irrespective of their domains. Cybersecurity has been impacting the financial industry for quite a few years, and the problem is still prevalent in the banking sector. We witnessed many cases where hackers penetrated the security layers of some big banks and stole a large sum out of it.
Banking institutions are still making considerable investments in the security aspect to make their customer’s data and their systems more secure than ever. The industry is leveraging the latest technological advancements of AI, ML, Blockchain, big data, etc. to yield positive results in terms of security.
What Can Be Done?
The banks need to invest in top-notch fintech software and mobile apps that are way more secure and impenetrable. They should keep their private information safe using a technologically advanced electronic medium.
F. Operational Risk:
When there is a failure in the internal processes of the bank due to inefficient systems, then it is termed as operational risk. We all know that banks have to perform a wide array of banking operations like daily transactions, cross-border transfers, cash deposits, and much more. However, there are times when the internal systems or the central system slows down.
In such a scenario, the bank faces losses due to operational risk. Not only that, when there are some other mistakes like payment transfer in the wrong account, or execution of an incorrect order, etc. also falls under operational risk. It is noteworthy here that banks do not directly get affected because of the operational risks.
What Can Be Done?
The operational risks can be minimized by automating the workflows so that the human interventions reduce. Also, the banks should use software from a trustworthy development company to ensure smooth operations.
G. Reputational Risk
Reputational risk is a significant result of the operational risk and, to some extent, the security risk. In other words, when a company fails to provide security to their customers, or when they perform inefficiently in processing their requests, then they suffer loss in users. People began spreading rumours about the bank, and the bank’s image gets spoiled.
The news channels interrogate the people and make false perspectives about the banks. In such a scenario, the daily revenue of the bank drastically reduces, and hence they suffer huge losses. They lose their stellar reputation in the global market, and their profits decrease.
What Can Be Done?
The banks should ensure smooth functioning and should provide safety and security to all of its customers. They should never participate in any unfair practices and should ensure customer satisfaction in every possible way.
H. Systematic Risk:
Whenever there are some external issues involved with the bank like employee’s strike, market fluctuation, non-stability of the government, and so on, then it is termed as Systematic risk. The systematic uncertainty is beyond the control of management since it entirely depends on the various external factors.
The losses due to systematic risks are unpredictable and cannot be wholly avoided. Banks suffer huge losses due to systematic risk and may have to write off certain assets to compensate for their losses.
What Can Be Done?
The systematic risks are entirely unpredictable, and so they cannot be eliminated. However, with smart skills, they can be minimized up to a certain extent.
I. Liquidity Risk:
Liquidity risks arise because of the increase in the non-profitable assets in the bank. That is, if there is an increase in the credit losses and losses due to business risk, then liquidity risk arises. Due to the rise in the liquidity risk, the bank becomes insufficient to meet the obligations if any depositor comes to withdraw its money.
Looking back in history, the losses due to liquidity risk was a significant concern of all the banks at that time. However, the present-day scenario has been completely changed. Now the banks have new regulations of keeping a minimum amount of reserved cash to mitigate liquidity risk. That implies that the depositors can be paid even during the time of credit for business loss.
What Can Be Done?
The banks should follow proper regulations of the central banks and should keep a minimum requisite amount in the banks to eliminate the chances of losses due to liquidity risk.
J. Moral Hazard:
Moral hazard is an entirely new type of risk when compared to the other mentioned risks. It came to light recently in the global market. The moral hazard occurs when a bank takes some risk, even when they know that someone else has to bear the losses. In other words, when a bank invests in a risky business, and it backfires, then it is the taxpayers who have to bear all the losses.
Although the central bank has been tracking the banks and their operations very carefully, some of them still take dreadful risks when not under the regulatory oversight. They get to indulge in the illegal practices and create an imbalance on the taxpayers when their planning fails.
What Can Be Done?
The central bank should pay more attention to the activities of the banks to eliminate the losses caused by moral hazards. The banks should also not indulge in risky businesses and should follow the proper path.

4. If I’m given that Opportunity.,I’ll say this..:
AMCON(Asset Management Corporation of Nigeria) as the name implies are all about Asset Management. In Accounting.,Asset management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value. Asset management professionals perform this service for others. They may also be called portfolio managers or financial advisors.
AMCON was created to be a key stabilizing and re-vitalizing tool aimed at reviving the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy. Their Practices worked magnificently during Ex President Goodluck Jonathan’s Regime when they succeeded at buying up the Bad Debts of Some Banks(5 Banks specifically) that were facing Liquidity Risk. They go on and buy those Bad Debts at lower Rates and then give the Bank Money and equally find a way to recover the Loans from Individuals or Firms that have refused to Pay.
This way.,many Banks were saved while some Merged or acquired the Assets of others. Reasons AMCON should continue is that it removes the fear of a Bank Liquidating from the Mind of the Customers and it equally helps Banks to recover some of their Bad Debts.,that alone means a whole lot in the Banking Sector.
AMCON was Successful when they were created.,why not continue with it and give the Banking Sector Hope and chances of Surviving more than other Sectors.

Name :Onuh Onyinye
Reg number :2018 /241872
Department :Economics department
Email :onuhonyinye7@gmail.com

Answer to question one

A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.

Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors).

A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans or mortgages. Alternatively, they may lend the money directly via the financial markets, and eliminate the financial intermediary, which is known as financial disintermediation.

In the context of climate finance and development, financial intermediaries generally refer to private sector intermediaries, such as banks, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers. Increasingly, international financial institutions provide funding via companies in the financial sector, rather than directly financing projects.

By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.

Answer to question two.

Consolidation is viewed as the process of reducing the number of banks and other deposit taking institutions with a simultaneous increase in the size, concentration and efficiency of the remaining entities in the sector. The process of consolidation has been argued to enhance bank efficiency through cost reduction and increase
revenue in the long run. It also reduces industry
risk by eliminating weaker banks and acquiring the smaller ones by bigger and stronger banks as well as creates opportunities for greater
diversification and financial intermediation.
The consolidation of the Nigerian banking system started after the announcement on July 6, 2004 by the Governor of the Central Bank of
Nigeria to the Bankers’Committee on banking
sector reforms. In order to encourage and assist banks to meet the requirements, some
incentives were promised by the Central Bank of Nigeria. The incentives
are:
_ Banks that consolidate will be allowed to participate in foreign exchange market.
_ Permission to collect public sector
deposits and government revenue.
_ Prospect to manage part of Nigerian foreign
reserves holdings.
_Tax incentives.
_ Reduction in
transaction cost Provision of
technical assistance by
the Central Bank.
_ Leadership award by the Governor of the Central Bank and Provision of help desk by the CBN to fast track approvals.
Further to the above incentives, the CBN Management reemphasized its commitment towards the consolidation process by approving on 6th April, 2005 forbearance package
for weaker and distress banks. They include:
A write-off of 80 per
cent Debt owned the CBN
by the banks, subject to:
i. The recovery of all
non-performing loans
belonging to owner/
insider related within
two months;
ii. Injection of any
shortfall in the banks’
capitalization to
solvency stage within
two months;
The conversion of
the balance of 20 per cent
of the debt to CBN to long
term loan of a maximum
of 7 years at 3 per cent per
annum including two
years moratorium.

Prospects
i. The initial public
offerings by banks
through the capital
market when completed is
likely to increase the level
of financial deepening as
evidenced in the upsurge
in the volume and value
of trading in the stock
market
ii. The reforms in the
banking industry has
been able to attract more foreign investment inflow, especially in the area ofportfolio investment, this
development if sustained will boost the level of
economic activity especially towards non oil
sector.
iii. The consolidation of banks is likely to attract
a significant level of foreign banks entrance
into Nigeria which will become a feature in the
industry over time. This will bring about more
confidence by the international community
of the banking sector inNigeria thereby attracting more foreign investment
into the country.
iv. As the level of financial intermediation
increase, interest rate is likely to fall and increase lending to the real sector
that will generate employment and booster
growth.

Challenges
i. The Central Bank of Nigeria’s ability to manage
and render assistance to the banking system to aid in the consolidation process has been a big
challenge that was applauded.

ii. Another important challenge facing the CBN
is in the area of timely
computation and
application of the cash reserve requirement on
banks within the stipulated two weeks
maintenance period. This will help a long way in reducing excess liquidity
in the system which is presently being experienced, which, if not checked will have a
multiplier effect on growth in money that may
not be consistent with the design of monetary policy targets.
iii. The consolidating banks in the short run will have to curtail with overall increase in risk profile because of the integration risk and inherent complexity of the rationalization process. The consolidating banks will have to device an effective way of dealing with the situation without detriment to the organization.
iv. The Central Bank of Nigeria has to strengthen its supervisory arm to effectively curtail any post-consolidation bank
runs and be pro active in dictating any corporate irregularities in the Industry. A sound banking system is expected to inspire the
confidence of depositors.
v. With globalization and financial liberalization in place, the banking system in Nigeria should focus on becoming a dominant player especially in the West African sub region.

Answer to question three

Due to the large size of some banks, overexposure to risk can cause bank failure and impact millions of people. By understanding the risks posed to banks, governments can set better regulations to encourage prudent management and decision-making.

The ability of a bank to manage risk also affects investors’ decisions. Even if a bank can generate large revenues, lack of risk management can lower profits due to losses on loans. Value investors are more likely to invest in a bank that is able to provide profits and is not at an excessive risk of losing money.

The major risks faced by banks include credit, operational, market, and liquidity risks.

1. Credit Risk
Is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.

2.Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra $50 bill to a customer.

3. Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
Commodity prices also play a role because a bank may be invested in companies that produce commodities. As the value of the commodity changes, so does the value of the company and the value of the investment.

4. Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.
Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers.

5. Systemic Risk
Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.

How such risks can be mitigated

Internally banks try to mitigate credit risk by ensuring thorough background checks are conducted to determine the ability of the borrower to fulfil their commitment to repay the loan, and also rely upon the help of credit rating agencies. In addition, securities are taken against a loan so in case of default the bank can recover the secured good and incur no loss. Interest rates are also used adjusted to the deemed risk, and so the riskier the loan the higher the premium. This ensures those that take out the loan at a higher rate are more inclined to be on time with payments as the cost of borrowing is higher, thus reducing the moral hazard. All these different areas are regularly monitored by banks as a small rise in credit risk can amount to the profitability of banks being extremely impacted.

Methods to mitigate liquidity risk vary. Asset liquid management is a commonly used method. This is where assets held are only highly liquid ones so large cash reserves and securities in which their value can be released very quickly. This method commonly used by both small and large entities as this method is seen as a more viable option than borrowing large amounts in the short term to cover liabilities. However, the biggest institutions may choose to borrow in the currency market to be more liquid. This is referred to borrowed liquidity risk management. Finally, a balance management strategy may be implemented, and this involves holding realisable securities and deposits at other banks.

Operational risk management involves establishing internal audit systems, assessing and eliminating weak control procedures, familiarizing all levels of staff with the complex operations and having appropriate insurance cover.

Market risk management involves developing a comprehensive and dynamic framework for monitoring, measuring and managing liquidity, interest rate, foreign exchange and commodity price risks. This should be integrated with the institution’s business strategy. In addition, stress testing can assess potential problem areas in a given portfolio.

Answer to question four

The Asset Management Corporation of Nigeria (AMCON) was established by an Act of the National Assembly on July 19th 2010, primarily to resolve the nations banking sector crisis and restore stability to its economy. It purports to do so by purchasing Non-Performing Loans from eligible financial institutions and effectively managing or disposing of them.

AMCON was created to be a key stabilizing and re-vitalizing tool aimed at reviving the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy.

Among the many advantages of AMCON include

To positively impact and improve the economy of Nigeria by;

Complementing the recapitalization of affected Nigerian banks.

Providing an opportunity for banks to sell off Non Performing Loans(NPLs).

Freeing up valuable resources and enabling banks focus on their core activities.

To propel the lending ideology in banks again.

Objectives of AMCON also include:

Section 4 AMCON Act, 2010 provides the objectives of AMCON as follows;

Assists eligible financial institutions to efficiently dispose of eligible bank assets in accordance with the provisions of the AMCON Act.

Efficiently manage and dispose of eligible bank assets acquired by the corporation in accordance with the provisions of the Act.

Obtain the best achievable financial returns on eligible bank assets or other assets acquired by it.

Maintaining the existence of AMCON could help it achieve its objectives of being a key stabilizing and re-vitalizing tool in the Nigerian economy, I think this would be a great tool of an effort to resuscitate an already dwindling Nigerian economy.

Ubechu Agatha Chidinma
2018/242441
Economics major

1. 1. Among the the cost advantages of using financial intermediaries include; reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risks. Discuss how financial intermediaries perform these functions in more details.

A non-bank financial intermediary does not accept deposits from the general public. The intermediary may provide factoring, leasing, insurance plans, or other financial services. Many intermediaries take part in securities exchanges and utilize long-term plans for managing and growing their funds. The overall economic stability of a country may be shown through the activities of financial intermediaries and the growth of the financial services industry. Banks connect borrowers and lenders by providing capital from other financial institutions and from the Federal Reserve. Insurance companies collect premiums for policies and provide policy benefits. A pension fund collects funds on behalf of members and distributes payments to pensioners.

2. The commercial banking consolidation initiated by CBN in June 2004 was aimed at strengthening the financial system. The exercise has been a huge success. The paid – up capital base of the bank was raised from N2billion to N25billion and many banks are now globally competitive. Clearly discuss the benefits of the consolidation and the failures (if any).

Consolidation is one of the trends that characterize banking industry restructuring in Nigeria. However, the emerging scale of bank mergers raises challenging policy questions that must be addressed by policy makers in the course of promoting economic efficiency while safeguarding the nation’s financial system. This paper analyses the challenges of the banking consolidation to the Central Bank of Nigeria (CBN). The paper is descriptive and uses literature survey method. Data was collected from secondary source through CBN publications, local and international journals and other published materials. The paper argues that the recent consolidation poses new challenges to the regulatory authority, particularly in the area of financial system stability. It therefore, recommends that CBN’s policies aimed at providing financial system stability and efficiency should take into consideration the process of banking consolidation and increasing globalisation of financial transactions. onsolidation. Although, the level and magnitude of changes in the system brought about by the reform is yet to be ascertained, the trend interrelates with the expansion of banking activities in the domestic economy and globalisation of the financial sector. nking consolidation is a matter of concern to central banks of the world as it may have adverse consequences on systematic stability. The magnitude of this effect however, depends on specific circumstances of each economy, such as quality of the regulatory framework, supervision practices, competition equity and financial market sophistication. Now that Nigeria is witnessing serious reforms in her financial system, attention should be given to the risks that arise from banking consolidation. Policies aimed at providing financial system stability and efficiency should take into consideration the processes of complexity of banking consolidation and increasing globalisation of financial transactions. 25bn-banking rescue will be too expensive. Therefore, key economic policies such as better regulatory guidelines and incentive for banks to fully participate in real sector financing must complement banking reforms. Managing a large commercial banking business is about managing risks, serving customers and controlling costs. Since consolidation is likely to continue, further policy measures may be desirable in order to maintain a healthy competitive environment and strengthen market efficiency. In order for the CBN to achieve this.

3. The risks faced by banks are enormous, clearly discuss the risks and how they can be mitigated.
Credit Risk

Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.

While banks cannot be fully protected from credit risk due to the nature of their business model, they can lower their exposure in several ways. Since deterioration in an industry or issuer is often unpredictable, banks lower their exposure through diversification.

By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. To lower their risk exposure, they can loan money to people with good credit histories, transact with high-quality counterparties, or own collateral to back up the loans.

Operational Risk

Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra $50 bill to a customer.

On a larger scale, fraud can occur through breaching a bank’s cybersecurity. It allows hackers to steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make it more difficult to attract deposits or business in the future.

Market Risk

Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.

Commodity prices also play a role because a bank may be invested in companies that produce commodities. As the value of the commodity changes, so does the value of the company and the value of the investment. Changes in commodity prices are caused by supply and demand shifts that are often hard to predict. So, to decrease market risk, diversification of investments is important. Other ways banks reduce their investment include hedging their investments with other, inversely related investments.

Liquidity Risk

Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.

Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers. Mismanagement of asset-liability duration can also cause funding difficulties. This occurs when a bank has many short term liabilities and not enough short-term assets.

Short-term liabilities are customer deposits or short-term guaranteed investment contracts (GICs) that the bank needs to pay out to customers. If all or most of a bank’s assets are tied up in long-term loans or investments, the bank may face a mismatch in asset-liability duration.

Regulations exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid assets to survive for a period of time even without the inflow of outside funds.

4. Assuming you are the current CBN governor and Mr. President tells you to write a position paper and justify why AMCON should continue to exist as a Corporation, what will you tell Mr. President.

AMCON is based on the fact that the CBN has succeeded largely in restoring stability in the Nigerian financial system which was hit by crisis in 2009 as a result of huge non performing loans which threatened the existence of many banks and saw the CBN intervening in five of the banks with N620 billion as bailout package. To ensure that none of the existing banks failed, the CBN in collaboration with the ministry of Finance set up the Asset Management Company of Nigeria AMCON. The call is also to curb moral hazards and fiscal risk that would arise if AMCON continues in business of buying off non performing loans from banks. Already operators are raising issues with the Company’s purchase of some performing loans.

According Chike Obi the Managing Director of AMCON, Asset Management Company of Nigeria was set up to achieve three-fold function, reducing the level of Non Performing Loans on the books of eligible banks; assisting in the recapitalisation of banks deemed to be in grave danger and managing all acquired assets in a manner consistent both with minimum resolution cost. The Asset Management Company of Nigeria (AMCON) has acquired 95 per cent of the Non-Performing Loans (NPLs) in the banking sector. Addressing newsmen in Lagos, the Managing Director, AMCON, Mustafa Chike-Obi, stated that at the end of October 2011, AMCON would have successfully acquired N2.78 trillion face value of bad loans from 21 banks at a cost of N1.16 trillion, adding that it had also injected N1.36 trillion into the remaining five banks, which failed the stress test carried out by the industry regulators in 2009, to bring them to a position of zero capital. Chike-Obi stated that the corporation is now moving to the third stage of managing all acquired assets, including NPLs, equity and real assets.

This is where the IMF advice came in. AMCON has achieved its primary objective of ridding the Nigerian banks of non performing loans which had the potential of triggering systemic distress in the Nigerian financial system.

Name:Aroh oluchukwu perpetua
Reg no:2018/243120
Dept:Economics
Course:Eco 324
1)Among the the cost advantages of using financial intermediaries include; reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risks. Discuss how financial intermediaries perform these functions in more details.
Ans
1)Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.

2)Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.

3)Providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.

4)Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.

5)Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.

2)The commercial banking consolidation initiated by CBN in June 2004 was aimed at strengthening the financial system. The exercise has been a huge success. The paid – up capital base of the bank was raised from N2billion to N25billion and many banks are now globally competitive. Clearly discuss the benefits of the consolidation and the failures
Ans

The consolidation of the banking industry in Nigeria started in 2004 when the CBN mandated all banks to meet the N25billion minimum paid-up capital by 31st December, 2005 (Donwa and Odia, 2010; Donwa and Odia, 2011; and Bebeji, 2013). The crux of the consolidation exercise in the Nigerian banking industry was recapitalization since banks needed adequate capital which according to Babalola (2011) would provide a cushion to withstand abnormal losses not covered by current earnings, such that banks would be able to regain equilibrium thereby re-establishing a normal earnings pattern.

In attempting to explain the ideology behind the recapitalization policy in Nigeria, Oladejo & Oladipupo (2011) noted that recapitalization as a reform in the banking industry was designed amongst others to create a more resilient, competitive and dynamic banking systems that would support and contribute positively to the growth of the economy. Oladejo & Oladipupo (2011) further opine that the exercise would guarantee strong and forward looking banking institutions that would be technology driven and ready to face the challenges of liberalization and globalization.

No doubt, recapitalization is simply a policy thrust aimed at raising the minimum paid-up capital (capital base) for banks in the country. The general belief is that banks with strong capital base would have the ability to absorb losses that may arise from non-performing liabilities (Adegbaju & Olokoyo, 2008).

Soludo (2004), pointed that recapitalisation of the Nigerian Banking Sector became necessary as a result of the fact that there was a high concentration of the sector by small banks whose capitalizations were below $10 million, yet were having very high fixed and operating costs. In order to survive, banks were advised to either consolidate with existing banks or raise additional funds through the capital market (Sulaimon, Akeke & Fapohunda, 2011).

3)The risks faced by banks are enormous, clearly discuss the risks and how they can be mitigated.
Ans:

Reputational Risk
Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.

Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business. For instance Citibank was recently viewed as manipulating the Forex rates via conducting false trades with its own trading partners. When regulators found out about Citibank’s predatory tactics, they levied huge fines on the bank.

Apart from the fines Citibank also lost reputation as a bank that follows fair trade practices when the customers found out that they tend to resort to market manipulation. Many prospective customers may have shifted their business away from Citibank as a result of this discovery causing monetary loss as a result of reputation loss.

Banks can save their reputation by ensuring that they never participate in any unfair or manipulative business practices. Also, banks need to continuously ensure that their public relations efforts project them as a friendly and honest bank.

Market Risks
Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets.

Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real estate which exposes them to commodity risks as well.

In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.

Credit Risks
Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category.

Often times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and businesses that are not likely to run out of income over the period of the loan. Credit rating agencies provide adequate information to enable the banks to make informed decisions in this regard.

The profitability of a bank is extremely sensitive to credit risks. Hence, even if credit risk rises by a small amount, the profitability of the bank can get extremely impacted. Therefore, to deal with such risks banks have come up with a wide variety of measures. For instance, banks always hold a certain amount of funds in reserves to mitigate such risks.

The moment a loan is made, a certain amount of money is appropriated to the provision account. Also, banks have started utilizing tools like structured finance to mitigate such risks. Securitization helps remove the concentrated risk from the bank’s books and diffuse it amongst the various investors in the capital markets. Credit derivatives like credit default swap have also come into existence to help banks survive in the event of a credit default.

Unpaid loans were, are and will always be a byproduct of conducting the banking business. Modern banks have realized this and are prepared to handle the situation without becoming insolvent until a catastrophic loss occurs.

4)Assuming you are the current CBN governor and Mr. President tells you to write a position paper and justify why AMCON should continue to exist as a Corporation, what will you tell Mr. President.
Ans

I will start by telling him how amcon impact positively in the economy
Amcon positively impact and improve the economy of Nigeria by;
1)Complementing the recapitalization of affected Nigerian banks;
2)Providing an opportunity for banks to sell off Non Performing Loans(NPLs);
3)Freeing up valuable resources and enabling banks focus on their core activities.
4)To propel the lending ideology in banks again.
 

NAME: OKOYE ADAEZECHUKWU PRECIOUS
REG NO: 2018/241831
COURSE CODE/TITLE: ECO 362 ( DEVELOPMENT ECONOMICS II)
DATE: 10/02/2022

ASSIGNMENT
1. Among the the cost advantages of using financial intermediaries include; reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risks. Discuss how financial intermediaries perform these functions in more details.

Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
Financial intermediaries helps to spread out and decrease risk, through a diversified portfolio which helps to spread out the risk of capital loss. Financial intermediaries receives funds from different customers which they bring together to form a mutual fund which they gives out to various investors. This helps to diversify risks of surplus lenders. Funds are spread across a diverse range of investment types, through financial intermediation.

2. The commercial banking consolidation initiated by CBN in June 2004 was aimed at strengthening the financial system. The exercise has been a huge success. The paid – up capital base of the bank was raised from N2billion to N25billion and many banks are now globally competitive. Clearly discuss the benefits of the consolidation and the failures (if any).

2i)Consolidation increases the size and concentration of entity, and at the same time, it reduces the number of interests in such a company. Shih (2003) is of the view that bank consolidation reduces the level of insolvency risk since it results to asset diversification.
2ii)increased size could potentially increase bank returns, through revenue and cost efficiency gains. It may also, reduce industry risks through the elimination of weak banks and create better diversification opportunities (see Berger, 2000).
2iii)They find that banking consolidation impacts positively and significantly on return on assets and net profit margin but significantly lowers return on equity. They conclude that banking consolidation in Nigeria has significant impact on the performance of the Nigerian banking sector.
A notable downside of the CBN 2004 consolidation initiative was that : study finds that the banking sector reforms brought many challenges for labour-management relations and these included among others the undermining of the principles of good industrial relations, job losses, employee turnover and loss of talents, loss of job commitment, low employee morale, casualistion of labour etc..

3. The risks faced by banks are enormous, clearly discuss the risks and how they can be mitigated.

Credit Risks
Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category.

Often times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and businesses that are not likely to run out of income over the period of the loan. Credit rating agencies provide adequate information to enable the banks to make informed decisions in this regard.

The profitability of a bank is extremely sensitive to credit risks. Hence, even if credit risk rises by a small amount, the profitability of the bank can get extremely impacted. Therefore, to deal with such risks banks have come up with a wide variety of measures. For instance, banks always hold a certain amount of funds in reserves to mitigate such risks.

The moment a loan is made, a certain amount of money is appropriated to the provision account. Also, banks have started utilizing tools like structured finance to mitigate such risks. Securitization helps remove the concentrated risk from the bank’s books and diffuse it amongst the various investors in the capital markets. Credit derivatives like credit default swap have also come into existence to help banks survive in the event of a credit default.

Unpaid loans were, are and will always be a byproduct of conducting the banking business. Modern banks have realized this and are prepared to handle the situation without becoming insolvent until a catastrophic loss occurs.

Market Risks
Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets.

Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real estate which exposes them to commodity risks as well.

In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.

Operational Risks
Banks have to conduct massive operations in order to be profitable. Economies of scale work in the favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an extremely difficult task.

Operational risk occurs as the result of a failed business processes in the bank’s day to day activities. Examples of operational risk would include payments credited to the wrong account or executing an incorrect order while dealing in the markets. None of the departments in a bank are immune from operational risks.

Operational risks arise mainly because of hiring the wrong people or alternatively they could also occur if there is a breakdown of the information technology systems. A lapse in the internal processes being followed could also lead to catastrophic errors. For instance, Barings Bank ended up bankrupt because of its failure to implement appropriate internal controls. One trader was able to bet so much in the derivatives market that the equity of Barings Bank was wiped out and the bank simply ceased to exist.

Moral Hazard
The recent bailout of banks by many countries has created another kind of risk called the moral hazard. This risk is not faced by the bank or its shareholders. Instead, this risk is faced by the taxpayers of the country in which banks operate. Banks have become accustomed to taking excessive risk. If their risk pays off, they get to keep the returns. However, if their risk backfires, then the losses are borne by taxpayers in the form of bailouts. This too big to fail model has caused banks to become reckless in their pursuit of profit. Although central banks are using audits to ensure that safe business practices are followed, banks nowadays indulge in risky business the moment they are not under regulatory oversight.

Liquidity Risk
Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.

Modern day banks are not very concerned about liquidity risk. This is because they have the backing of the central bank. In case there is a run on a particular bank, the central bank diverts all its resources to the affected bank. Therefore, the depositors can be paid back when they demand their deposits. This restores depositor’s confidence in the banks finances and the run on the bank is averted.

Many modern day banks have faced bank runs. However, none of them have become insolvent due to a bank run post the establishment of central banks.

Business Risk
The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run.

Hence, there is always a risk that a given bank may choose the wrong strategy. As a result of this wrong choice, the bank may suffer losses and end up being acquired or may simply collapse. Consider the case of banks such as Washington Mutual and Lehman Brothers. These banks chose the subprime route to growth. Their strategy was to be the preferred lender to people who have less than perfect credit scores. However, the whole area of subprime lending went bust and since these banks had heavy exposures to such loans, they suffered dire consequences too.

Banks have no possible way to mitigate the risks that are created by following inappropriate business objectives. Which objectives were right and which were wrong? This question can only be answered in hindsight. When Lehman Brothers was focusing their resources on subprime lending, it must have seemed like the strategically right thing to do!

Reputational Risk
Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.

Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business. For instance Citibank was recently viewed as manipulating the Forex rates via conducting false trades with its own trading partners. When regulators found out about Citibank’s predatory tactics, they levied huge fines on the bank.

Apart from the fines Citibank also lost reputation as a bank that follows fair trade practices when the customers found out that they tend to resort to market manipulation. Many prospective customers may have shifted their business away from Citibank as a result of this discovery causing monetary loss as a result of reputation loss.

Banks can save their reputation by ensuring that they never participate in any unfair or manipulative business practices. Also, banks need to continuously ensure that their public relations efforts project them as a friendly and honest bank.

Systemic Risk
Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.

They have to write off certain assets as a result of the failure of their counterparty. This writing off often leads to the bankruptcy of other banks and an unstoppable domino seems to take over. Systemic risk is an extremely bad scenario to be in. For instance when the subprime crisis happened in 2008, it seemed like the entire global financial system would collapse.

The very nature of banking system therefore makes them prone to systemic risks. Systemic risks do not affect an individual bank rather they affect the entire system. Hence, there is very little that an individual bank can do to protect itself in the event that such a risk materializes.

Thus, the management of banks requires a lot of skill since multiple types of risks need to be mitigated. Some of these risks can be avoided whereas for the others the best that banks can do is to minimize their damage.

4. Assuming you are the current CBN governor and Mr. President tells you to write a position paper and justify why AMCON should continue to exist as a Corporation, what will you tell Mr. President.
AMCON has brought about a huge benefit to most financial institutions in the country and also to the customers of various banks in the country by giving them the assurance that their assets are secured and are in safe hands ….AMCON was created to be
a key stabilizing and re-vitalizing tool aimed at reviving the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy.
Some of the benefits that AMCON has brought to the table include :
● Reduce Customer Complaints. …
●Increase Customer Value. …
●Improve Efficiency by Understanding Equipment Utilization. …
●Budgeting (and Decisioning) for the Future. …
●Ensure Compliance with Regulations and Accreditations. …
●Equipment Maintenance. …
●Reduce Loss. …
●Theft Prevention.

Odo ONOCHIE GODSMARK
2017/249540

Question I
Role of Financial Intermediaries

Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.

There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges.

Gershenkron (1962) stated that banks are the largest financial intermediaries that effectively finance industrial expansion in developing countries. Banks are the largest financial intermediaries in the Nigerian economy. According to Schumpeter (1911) bank financial intermediation does not only entail creation of a pool of investible funds, it also involves allocating funds effectively.

Financial intermediaries perform five functions:

Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.

Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.

Providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.

Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.

Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.

Financial Intermediaries and Economic Growth

King and Levine (1993), citing Schumpeter (1911), state that, “the services provided by financial intermediaries – mobilizing savings, evaluating projects, managing risks, monitoring managers, and facilitating transactions – are essential for technological innovations and economy”. This statement motivated King and Levine to empirically test the logic behind this statement. This statement also motivated others into studying the relationship between finance and economic growth.

Question 2A
The Benefits were ;
Banks that
consolidate will be allowed
to participate in foreign
exchange market.
Permission to
collect public sector
deposits and government
revenue.
Prospect to manage
part of Nigerian foreign
reserves holdings.
Tax incentives.
Reduction in
transaction cost
Provision of
technical assistance by
the Central Bank.
Leadership award
by the Governor of the
Central Bank and
Provision of help
desk by the CBN to fast
track approvals.
Further to the above
incentives, the CBN
Management
reemphasized its
commitment towards the
consolidation process by
approving on 6th April,
2005 forbearance package
for weaker and distress
banks2. They include:
A write-off of 80 per
cent Debt owned the CBN
by the banks, subject to:
i. The recovery of all
non-performing loans
belonging to owner/
insider related within
two months;
ii. Injection of any
shortfall in the banks’
capitalization to
solvency stage within
two months;
The conversion of
the balance of 20 per cent
of the debt to CBN to long
term loan of a maximum
of 7 years at 3 per cent per
annum including two
years moratorium.
Question 2B
The Challenges and
Prospects of consolidation.

The current movement
towards the consolidation
of banking systems in
Nigeria has held promises
and challenges for both
the monetary authorities
and the deposit money
banks in particular. Some
of these challenges and
prospects bordered on:
Challenges
i. The Central Bank of
Nigeria’s ability to manage
and render assistance to
the banking system to aid
in the consolidation
process has been a big
challenge that was
applauded.
ii. Another important
challenge facing the CBN
is in the area of timely
computation and
application of the cash
reserve requirement on
banks within the
stipulated two weeks
maintenance period. This
will help a long way in
reducing excess liquidity
in the system which is
presently being
experienced, which, if not
checked will have a
multiplier effect on
growth in money that may
not be consistent with the
design of monetary policy
targets.
iii. The consolidating
banks in the short run will
have to curtail with overall
increase in risk profile
because of the integration
risk and inherent
complexity of the
rationalization process.
The consolidating banks
will have to device an
effective way of dealing
with the situation without
detriment to the
organization.
iv. The Central Bank of
Nigeria has to strengthen
its supervisory arm to
effectively curtail any
post-consolidation bank
runs and be pro active in
dictating any corporate
irregularities in the
Industry. A sound
banking system is
expected to inspire the
confidence of depositors.
v. With globalization
and financial
liberalization in place, the
banking system in Nigeria
should focus on becoming
a dominant player
especially in the West
African sub region
Question 3A
Risks faced by banks

Moral Hazard

The recent bailout of banks by many countries has created another kind of risk called the moral hazard. This risk is not faced by the bank or its shareholders. Instead, this risk is faced by the taxpayers of the country in which banks operate. Banks have become accustomed to taking excessive risk. If their risk pays off, they get to keep the returns. However, if their risk backfires, then the losses are borne by taxpayers in the form of bailouts. This too big to fail model has caused banks to become reckless in their pursuit of profit. Although central banks are using audits to ensure that safe business practices are followed, banks nowadays indulge in risky business the moment they are not under regulatory oversight.

Liquidity Risk

Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.

Modern day banks are not very concerned about liquidity risk. This is because they have the backing of the central bank. In case there is a run on a particular bank, the central bank diverts all its resources to the affected bank. Therefore, the depositors can be paid back when they demand their deposits. This restores depositor’s confidence in the banks finances and the run on the bank is averted.

Many modern day banks have faced bank runs. However, none of them have become insolvent due to a bank run post the establishment of central banks.

Business Risk

The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run.

Hence, there is always a risk that a given bank may choose the wrong strategy. As a result of this wrong choice, the bank may suffer losses and end up being acquired or may simply collapse. Consider the case of banks such as Washington Mutual and Lehman Brothers. These banks chose the subprime route to growth. Their strategy was to be the preferred lender to people who have less than perfect credit scores. However, the whole area of subprime lending went bust and since these banks had heavy exposures to such loans, they suffered dire consequences too.

Banks have no possible way to mitigate the risks that are created by following inappropriate business objectives. Which objectives were right and which were wrong? This question can only be answered in hindsight. When Lehman Brothers was focusing their resources on subprime lending, it must have seemed like the strategically right thing to do!

Reputational Risk

Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.

Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business. For instance Citibank was recently viewed as manipulating the Forex rates via conducting false trades with its own trading partners. When regulators found out about Citibank’s predatory tactics, they levied huge fines on the bank.
Question 3B
Here are four pieces of advice:

1. Document the rationale for loan upgrades. Linda Keith CPA, whose firm trains business lenders in credit analysis, says bankers should be careful to document the thinking behind their judgment that a loan should be upgraded for purposes of the allowance for loan and lease losses (ALLL). “It’s important to eliminate regulator guesswork,” she says. It’s also important, she says, for financial institutions to verify that guidelines for analyzing a potential upgrade are “clear, clearly communicated to, and consistently followed.” Keith will help lead a presentation on deciding and defending upgraded loans for the ALLL at the Dec. 5-6 summit.

2. Don’t be afraid to uncover vulnerabilities. RMPI Consulting partner Jay Gallo, who will discuss “Integrating Risk Appetite, Stress Testing and Capital Planning,” says stress testing is positive in that it enables financial institutions to gauge their potential vulnerability to exceptional but plausible adverse events. “Stress testing should assess and quantify your institution’s vulnerabilities under multiple unfavorable scenarios,” he says. “Once the potential downside is understood, you can take steps to reduce or mitigate those risks, or you can ensure you have sufficient capital to manage those risks.”

[For More On Stress Testing, CHeck Out: How Legacy Systems and Lack of Data Undermine Stress Tests]

3. Develop a successful stress testing framework with three “knows.” Jack Gregory and Dave Keever, senior stress testing and credit experts for Crowe Horwath, say financial institutions looking to prepare and manage stress test forecasts need to know three key things: • The institution’s portfolio.

• The scenarios and their impact on the bank’s capital and liquidity.

• The forecasts including what they show and why.

Gregory and Keever’s presentation will also outline three lines of defense all institutions need for stress-test production. 4. Set deadlines. “To make the year-end ALLL as efficient as possible, it is best to get as much work done as possible prior to year end,” says Mike Lubansky, director of consulting services at Sageworks. To do that, financial institutions should set hard deadlines for:

• Risk-rating changes.

• Charge-offs.

• Updating the core system to reflect the risk-rating changes.

• Determining the loans that need to be reviewed for impairment
Question 4
2.Providing an opportunity for banks to sell off Non Performing Loans(NPLs)
3.Freeing up valuable resources and enabling banks focus on their core activities.
4.To propel the lending ideology in banks again.
1.Complementing the recapitalization of affected Nigerian banks

Name: Nduka Olisazoba Chiebuniem
Reg no: 2018/241844
Department: Economics
Course: ECO 324

1) Reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risk. This is a very import function of financial intermediaries, this is because there are alot of problems to lending and borrowing money, the conflict or perhaps risks like the borrower defaulting in paying moneu he borrowed back is curbed by financial intermedaries, with various stratefies like asking for collateral equivalent to the value of the loan before it is released to the borrower, this and various other risks and conflicts are corrected by financial intermediaries.
2)There are various advantages of consolidation,
i) it creates a safe and stable financial sector,
ii)The risk of sudden liquidation of banks and customers losing their money is grossly reduced,
iii) Restructuring the banks by increasing its capital base in order to primarily increase depositors’ confidence in the sector which will in the long run
iv)The crux of the consolidation exercise in the Nigerian banking industry was recapitalization since banks needed adequate capital which according to Babalola (2011) would provide a cushion to withstand abnormal losses not covered by current earnings, such that banks would be able to regain equilibrium thereby re-establishing a normal earnings pattern.
Though all these advantages sound so wonderful, there are few diaadvantages
i) Considation of banks led the existence of a fewer banks and with this, came a form of monopoly, these banks could potentially take advantage of their positions to take advantage of both their customers and the CBN in various ways. For example, they know that they are too big to fail and too vital to the financial sector’s stability and that the CBN will never let them be in such a rough financial situation thay would lead to liquidation, the CBN will just bail them out or just facilitate their acquisition by another bank, having this in mind, can make these banks that survived the consolidation to be careless.
3) Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations.
How this risk can be mitigated is when the banks carefully look into the financial history of borrowers before lending money to them.
ii)Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes.
A way to mitigate this risk is for the bank to increase its security both cyber and physical. They also have to occasionally hire external accountants to audit their books to check for inconsistencies and fraud.
iii)Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
The way to mitigate this is simply by banks risking just funds that they can afford to lose when they are trading in the capital market. The funds that they take out to trade must not affect their operation in the short run.
iv)Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. 
The way to migate this is for the banks to increase their bank required reserve.
4) Good day Mr.President,
    There are various reasons for the continual existence of AMCON as a corporation. They include:
i) Complementing the recapitalization of affected Nigerian banks.
ii) Providing an opportunity for banks to sell off Non-Peeforming Loans(NPL).
iii) Freeing up valuable resources and enabling banks focus on core activities.
iv) To propel the lending ideology in banks again.

Name: Kalu Melody Chinaza
Department: Economics
Registration number: 2018/245127
An assignment on Eco 324

1. Among the the cost advantages of using financial intermediaries include; reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risks. Discuss how financial intermediaries perform these functions in more details

A. Reconciling conflicting preferences of lenders and borrowers: When using a financialintermediary one tends to have lower search costs as they don’t have to find the rightlenders, you leave that to a specialist. And since the financial intermediaries bridge the gap between lenders and borrowers, this can help to reduce risk on the part of the lenders- because they believe their money is in safe hands since the financial intermediaries are legally bounded.

B. Helping to spread out and decrease risks: Financial intermediaries pool risk by spreading funds across a diverse range of investments and loans. Loans benefit households and countries by enabling them to spend more money than they have at the current time.

2. Benefits of the commercial banking consolidation initiated by CBN
A. Quality of services – When banks combine their services, they also consolidate their resources and talents which ultimately improve the quality and efficiency of services.
B. Less statements – In some cases as banks consolidate, our accounts also consolidate. Not only this provides an opportunity for the banks to reduce their costs of printing and mailing the account statements, it also provides consumers an opportunity to reduce the amount of paperwork they have to deal with and monitor.

C. Efficient account monitoring – As accounts consolidate as a result of bank mergers, consumers can review their multiple account activities in just one account and therefore reduce the amount of time they spend reviewing account activities, and, be more efficient in detecting fraud.
D. Reduced costs – When banks consolidate, they reduce their operating costs which ultimately should reflect in the fees charged to customers.
FAILURES
– Acquiring banks have to bear the burden of weaker banks.
– Very challenging to manage the people and culture of different banks.
– Also destroy the idea of decentralization as many banks have a regional audience to cater
– Large banks are more vulnerable to global economic crises.
-Mergers may make it difficult for private banks to gain faster market share as most anchor banks are large.

3. RISKS FACED BY BANKS

A. Credit Risk: Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided. In order to manage credit risks, each bank should have specific terms and conditions that it is willing to operate under, but you will need to determine what those are, and then stick with them as you bring on new credit customers.

B. Operational Risk: Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra N50 bill to a customer.
How can you avoid this? According to banktel.com, “the answer is easy to state, but hard to implement. Adding more internal rules and accountability may be the answer, but, unfortunately, the bending of internal rules is far too common in the banking industry. Fostering a sense of unity among your team members can be a helpful place to start. When everyone has a vested interest in seeing your bank succeed, the temptation to bend rules is lessened. Also, adding monitoring programs to help identify risky behavior and put a stop to it can help limit this type of risk.”

C. Market Risk: Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading. Managing market risk is not something new to the modern bank, it’s just newly pressing because of recent market years. The best strategy, for managing market risk, is one of diversification. Ensuring that assets are held in a wide range of investment options will help limit this type of risk.

D. Liquidity Risk: Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run. The key to managing liquidity risk is to create mismatches between asset and liability maturity, and then to ensure that those mismatches keep enough funds flowing in the bank to both increase assets and meet obligations when customers ask for their money.

4. AMCON (Asset Management Corporation of Nigeria) should continue to exist because according to its mission, it has protected commercial banks from bad debts or non performing loans. How? By buying those loans and debt, at a discount rate, from the banks and paying them in cash then go after the debtors. AMCON was created to be a key stabilizing and re-vitalizing tool aimed at reviving the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy.
According to them, AMCON has acquired the Eligible Bank Assets (EBAs) or Non-performing Loans (NPLs) of various Eligible Financial Institutions (EFIs) in three different phases/ tranches. The top 5 EFIs represent 58.18% of all purchased Eligible Bank Assets. Hence, it has helped to protect ailing and lagging banks by buying up their bad debts.

NAME : OGENYI, CHUKWUEBUKA FREDERICK

DEPARTMENT : ECONOMICS

REG. NO : 2018/241864

COURSE : ECO 324 ( FINANCIAL MARKET AND INSTITUTIONS)

ASSIGNMENT :

1. Among the the cost advantages of using financial intermediaries include; reconciling conflicting preferences of lenders and borrowers and also helping to spread out and decrease risks. Discuss how financial intermediaries perform these functions in more details.
2. The commercial banking consolidation initiated by CBN in June 2004 was aimed at strengthening the financial system. The exercise has been a huge success. The paid – up capital base of the bank was raised from N2billion to N25billion and many banks are now globally competitive. Clearly discuss the benefits of the consolidation and the failures (if any).

3. The risks faced by banks are enormous, clearly discuss the risks and how they can be mitigated.
4. Assuming you are the current CBN governor and Mr. President tells you to write a position paper and justify why AMCON should continue to exist as a Corporation, what will you tell Mr. President.

ANSWERS :

N0. 1
A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly.[4] That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans or mortgages.[5] Alternatively, they may lend the money directly via the financial markets, and eliminate the financial intermediary, which is known as financial disintermediation.

In the context of climate finance and development, financial intermediaries generally refer to private sector intermediaries, such as banks, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.[6] Increasingly, international financial institutions provide funding via companies in the financial sector, rather than directly financing projects.

Reconciling conflicting preferences of lenders and borrowers- When using a financialintermediary one tends to have lower search costs as they don’t have to find the rightlenders, you leave that to a specialist.Risk aversion- intermediaries help spread out and decrease the risks.Rather than lending tojust one individual, you can deposit money with a financial intermediary who lends to avariety of borrowers – if one fails, you won’t lose all your funds.Economies of scale -using financial intermediaries reduces the costs of lending andborrowing. A bank can become efficient in collecting deposits, and lending. This enableseconomies of scale – lower average costs. If you had to seek out your own saving, you mighthave to spend a lot of time and effort to investigate best ways to save and borrow.Economies of scope -intermediaries concentrate on the demands of the lenders andborrowers and are able to enhance their products and services (use same inputs to producedifferent outputs).Convenience of Amounts -The bank can lend you the aggregate deposits from the bank andsave you finding someone with the exact right sum. If you want to borrow R10, 000 – itwould be difficult to find someone who wanted to lend exactly R10, 000. But, a bank mayhave 1,000 people depositing R10 each.By accepting many small deposits, banksempower themselves to make large loans available.

N0. 2

In order to strengthen the competitive and operational capabilities of banks in Nigeria with a view towards returning global and public confidence to the Nigerian banking sector and the economy in general, the Central Bank of Nigeria instituted a banking reform which saw most of the then existing 89 banks merging with each other. It was earlier speculated in some financial analysis quarters that the exercise might turn out to be one of those overblown hypes of an ailing economy. This, however, has turned out to be the opposite as most post-merger results tend to highlight that financial synergies exist. This paper tries to evaluate the authenticity of this assertion. To do this, pre-merger and post merger financial statements of 4 consolidated banks were obtained, adjusted, carefully analyzed and compared. The result revealed that all the four merger groups produced in addition to operational and relational synergy, financial gains far more than the 2+2=5 synergistic effects. The validating two-way ANOVA test also revealed that variations in shareholders funds can significantly affect the value of total assets of a bank.
1. Strengthened the institutional framework for the conduct of monetary policy
2. Bank recapitalization/consolidation
3. Programme to possibly eliminate or reduce government ownership of any bank (to no more than 10 percent)
4. Improved transparency and corporate governance
5. Zero tolerance to misreporting and data rendition, and strict adherence to the
6. Anti-money laundering regulations
7. Implementation of Basel II Principles and Risk-based supervision
8. Payments system reforms for efficiency—- especially the e-payment
9. Reforming the Exchange rate management system— adoption of the Wholesale
10. Dutch Auction System (WDAS) and increased liberalization of the forex market (which since 2006 led to the convergence of the parallel and official exchange rates for the first time in 20 years).

11. Restructuring the Nigerian Security Printing and Minting, Plc;
12. Addressing issues of technology and skills in the banking industry especially in risk management and ICT.
13. Launching of a new Micro finance policy and regulatory framework to serve the un-served 65 percent of the bankable public
14. Ongoing Pension, Consumer credit, and Mortgage system reforms
15. Forging strategic alliances and partnerships between Nigerian banks and foreign financial institutions especially in the area of reserve/asset management
16. Establishment of Africa Finance Corporation (AFC), as first private-sector led African Investment Bank

17. Encouragement of Nigerian banks to go global, leading to more than doubling of branch network in West Africa since 2004; setting up of subsidiaries in London as well as Nigerian banks successfully issuing Eurobonds and getting listed on the London Stock Exchange. Particularly, the grand objective in the banking sector reforms was to re-engineer and fast-track a system that will engender confidence and power a new economy. But whether this objective can be achieved will depend to a large extent on how the reform is implemented. Going by the main focus of the reform, banks recapitalization and consolidation stands out. The main method by which this aspect was achieved was by asking individual banks to raise their capital base to a minimum of N25Billion or in the alternative merge with others. The merger option thereafter became the most feasible solution as only Zenith Bank Plc was able to reach this level out of the entire 89 of them. The question now is; how viable are these mergers or business combinations? Business combinations result as spin-off effects from corporate restructuring. Owing to the ever￾changing nature of global business environment culminating from rapid interactive economic movements as driven by innovations and obsolesces in technology, corporate restructuring had become a regular exercise in capitalist and semi-capitalist economies. Corporate restructuring in the words of Pandey (2005:672) refers to changes in ownership, business mix, assets mix and alliances with a view to enhance the shareholders value. The most common forms of business combination are mergers and acquisitions.

N0. 3

Risks face by banks :

It is often said that profit is a reward for risk bearing. Nowhere is this truer than in the case of banking industry. Banks are literally exposed to many different types of risks. A successful banker is one that can mitigate these risks and create significant returns for the shareholders on a consistent basis. Mitigation of risks begins by first correctly identifying the risks, why they arise and what damage can they cause. In this article, we have listed the major types of risks that are faced by every bank. They are as follows:

1. Credit Risks:

Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category.
Often times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and businesses that are not likely to run out of income over the period of the loan. Credit rating agencies provide adequate information to enable the banks to make informed decisions in this regard.
The profitability of a bank is extremely sensitive to credit risks. Hence, even if credit risk rises by a small amount, the profitability of the bank can get extremely impacted. Therefore, to deal with such risks banks have come up with a wide variety of measures. For instance, banks always hold a certain amount of funds in reserves to mitigate such risks.
The moment a loan is made, a certain amount of money is appropriated to the provision account. Also, banks have started utilizing tools like structured finance to mitigate such risks. Securitization helps remove the concentrated risk from the bank’s books and diffuse it amongst the various investors in the capital markets. Credit derivatives like credit default swap have also come into existence to help banks survive in the event of a credit default.
Unpaid loans were, are and will always be a byproduct of conducting the banking business. Modern banks have realized this and are prepared to handle the situation without becoming insolvent until a catastrophic loss occurs.

2. Market Risks:

Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets.
Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real estate which exposes them to commodity risks as well.
In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.

3. Operational Risks :

Banks have to conduct massive operations in order to be profitable. Economies of scale work in the favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an extremely difficult task.
Operational risk occurs as the result of a failed business processes in the bank’s day to day activities. Examples of operational risk would include payments credited to the wrong account or executing an incorrect order while dealing in the markets. None of the departments in a bank are immune from operational risks.

Operational risks arise mainly because of hiring the wrong people or alternatively they could also occur if there is a breakdown of the information technology systems. A lapse in the internal processes being followed could also lead to catastrophic errors. For instance, Barings Bank ended up bankrupt because of its failure to implement appropriate internal controls. One trader was able to bet so much in the derivatives market that the equity of Barings Bank was wiped out and the bank simply ceased to exist.

4. Moral Hazard:

The recent bailout of banks by many countries has created another kind of risk called the moral hazard. This risk is not faced by the bank or its shareholders. Instead, this risk is faced by the taxpayers of the country in which banks operate. Banks have become accustomed to taking excessive risk. If their risk pays off, they get to keep the returns. However, if their risk backfires, then the losses are borne by taxpayers in the form of bailouts. This too big to fail model has caused banks to become reckless in their pursuit of profit. Although central banks are using audits to ensure that safe business practices are followed, banks nowadays indulge in risky business the moment they are not under regulatory oversight.

5. Liquidity Risk:

Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.
Modern day banks are not very concerned about liquidity risk. This is because they have the backing of the central bank. In case there is a run on a particular bank, the central bank diverts all its resources to the affected bank. Therefore, the depositors can be paid back when they demand their deposits. This restores depositor’s confidence in the banks finances and the run on the bank is averted.
Many modern day banks have faced bank runs. However, none of them have become insolvent due to a bank run post the establishment of central banks.

6. Business Risk :

The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run.
Hence, there is always a risk that a given bank may choose the wrong strategy. As a result of this wrong choice, the bank may suffer losses and end up being acquired or may simply collapse. Consider the case of banks such as Washington Mutual and Lehman Brothers. These banks chose the subprime route to growth. Their strategy was to be the preferred lender to people who have less than perfect credit scores. However, the whole area of subprime lending went bust and since these banks had heavy exposures to such loans, they suffered dire consequences too.
Banks have no possible way to mitigate the risks that are created by following inappropriate business objectives. Which objectives were right and which were wrong? This question can only be answered in hindsight. When Lehman Brothers was focusing their resources on subprime lending, it must have seemed like the strategically right thing to do!

7. Reputational Risk:

Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.
Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business. For instance Citibank was recently viewed as manipulating the Forex rates via conducting false trades with its own trading partners. When regulators found out about Citibank’s predatory tactics, they levied huge fines on the bank.
Apart from the fines Citibank also lost reputation as a bank that follows fair trade practices when the customers found out that they tend to resort to market manipulation. Many prospective customers may have shifted their business away from Citibank as a result of this discovery causing monetary loss as a result of reputation loss.
Banks can save their reputation by ensuring that they never participate in any unfair or manipulative business practices. Also, banks need to continuously ensure that their public relations efforts project them as a friendly and honest bank.

8. Systemic Risk :

Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.
They have to write off certain assets as a result of the failure of their counterparty. This writing off often leads to the bankruptcy of other banks and an unstoppable domino seems to take over. Systemic risk is an extremely bad scenario to be in. For instance when the subprime crisis happened in 2008, it seemed like the entire global financial system would collapse.The very nature of banking system therefore makes them prone to systemic risks. Systemic risks do not affect an individual bank rather they affect the entire system. Hence, there is very little that an individual bank can do to protect itself in the event that such a risk materializes.
Thus, the management of banks requires a lot of skill since multiple types of risks need to be mitigated. Some of these risks can be avoided whereas for the others the best that banks can do is to minimize their damage.

How they can be mitigated :

How To Reduce Operational Risk:
1. Managing Equipment Failures.
2. Keep Strong Business to Business Relationships. …
3. Having Adequate Insurance.
4. Know the Regulations.
5. Employing highly qualified personnels.

N0. 4

Why AMCON should continue to exist :

One of the most prominent developments in international finance in recent time and the one that is likely going to assume even greater importance in future is “securitization”. Simply put, securitization is the process of making a loan or mortgage into a tradable security by issuing a bill of exchange or other negotiable paper in place of it (Dictionary of Banking and Finance, 2005). It is a financial technique where assets, and or the rights to future cash flows are sold for cash to a third party. This third party, usually a Special Purpose Vehicle (SPV), raises funds for the purchase through the issuing of bonds or commercial paper. Although, it no longer owns them, the originator of the assets/cash often retains right to a portion of the income generated (Aidan O’Neill, Ronan White, 2001:40). The name “securitization” is derived from financial instruments used to obtain funds from the investors (Sachin, 2005). Financial institutions, like any other business organization, have some risks to manage before they can successfully achieve their aim and objectives, which are mostly profit oriented. The Nigerian banking reform which commenced in 2009 consequent upon the stress tests that were carried out on some Nigerian Deposit Money Banks led to the dismissal and prosecution of five Banks’ Chief Executive Officers. The aggregate percentage of non￾performing loans of the five banks was 40.81 with chronic borrowing at the Expanded Discount Window (EDW) of the CBN, indicating that they had little cash on hand (Alford, 2011). On August 14, 2009, the CBN declared the five banks as insolvent. Non-performing loans (NPLs) are loans which do not generate income for relatively long period of time; that is the principal and/or interest on these loans are left unpaid for at least 90 days (Caprio and Klingebiel, 1995). Non-performing Loans (NPLs) have become contemporary issues in credit management and undoubtedly the new frontier in finance. Loans are the major output provided by banks, but loan is a risk output hence there is an ex ante risk for a loan to finally become non-performing. It can be treated as undesirable outputs or costs to a bank, which will decrease the bank’s performance (Chang, 1999).Goldstoin and Turner (1996) and Servigny and Renault (2004) attributed the accumulation of Non-performing loans (NPLs) to a number of factors, including economic downturns and macroeconomic volatility, terms of trade deterioration, high interest rate, excessive reliance on overly high-priced inter-bank borrowings, insider lending and moral hazard. Because of mounting pressure of Non-performing Loans (NPLs) on bank’s balance sheets and incessant bank failures, the Central Bank of Nigeria’s Prudential Guidelines (1990) and subsequent reviews subsume credit facilities into loans, advances, overdrafts, commercial papers, banker’s acceptances, bills discounted, leases, guarantees, and other loss contingencies connected with a bank credit risks. The CBN report over the years found out that Non-performing Loans (NPLs) reduces banks’ liquidity, credit expansion, slow down the growth of the real sector with the direct consequences on the performances of banks and the economy as a whole (Kassim, 2012).Controlling NPLs is hence very important for both an individual bank’s performance and an economy’s financial environment (McNulty et al. 2001). Because banks provide the oil for corporate financing, saddling them with unpaid loans will hampered its credit intermediation role because a huge portion of loanable funds have to be reserved as provisions for possible losses, instead of being productively used for new loans and investments (Terada-Hagiwara and Pasadilla, 2004). The erstwhile CBN Governor, Sanusi Lamido argued that eight factors caused the Nigerian financial crisis: “ macroeconomic instability caused by large and sudden capital inflows, major failures in corporate governance at banks, lack of investor and consumer sophistication, inadequate disclosure and transparency about the financial position of banks, critical gap in regulatory frameworks and regulations, uneven supervision and enforcement, unstructured governance and management processes at the CBN/weaknesses within the CBN, and weaknesses in the business environment” (Alford, 2011) .At the end of 2011 financial year, it was obvious that the banks were neck deep in measures to come out clean in the 2012 performance an excuse given by a number of banks that posted not so encouraging results for their 2011 operations. This development was confirmed by the International Financial Advisory Firm, Renaissance Capital Limited, in its recent report on the big five banks in Nigeria, noting that with the exception of Access bank Plc., the NPLs ratios for the banks are now below the 5 per cent CBN guideline (ThisDay Newspaper, 2012). The big five banks are First Bank Plc., Guaranty Trust Bank Plc., Zenith Bank Plc., Access Bank Plc. and the United Bank for Africa Plc (ThisDay Newspaper, 2012). Governmental approach towards resolving these threats to banking industry performance and economic stability led to the establishment of Assets Management Corporation of Nigeria (AMCON) following the passage into law the Assets Management Corporation of Nigeria Bill on July 19, 2010. The rationale behind the establishment of AMCON is for the corporation to purchase the toxic assets from the banks and after the purchase the banks will have “clean” balance sheet. This paper therefore examines the impact of securitization on the performance of Nigerian banks and the contribution to the stability of the entire banking industry.

AMCON importance :

It is noteworthy to mention that AMCON is arguably regarded as a securitisation vehicle. According to the Assets Management Corporation of Nigeria Act (2010), the Corporation isestablished to achieve, among others, the following objectives:

1. Assist Eligible Financial Institutions to efficiently dispose of Eligible Bank Assets in accordance with the provisions of the Act;

2. Efficiently Hold, manage, realize and dispose of Eligible Bank Assets (including the collection of interest, principal and capital due and the taking over of collateral securing such assets) acquired by the corporation in accordance with the provisions of the Act;

3. Obtain the best achievable financial returns on Eligible Bank Assets or other assets acquired by it in pursuance of the provision of the Act;

4. Paying coupons on and redeeming at maturity, bonds and debt securities issued by the Corporation as consideration for the Acquisition of Eligible bank assets in accordance with the provisions of the Act.
5. Performing such other functions, directly related to the management or the realization of Eligible Bank Assets that the corporation has acquired.

Name: Ugwueze Martha Chioma
Reg No:2018/247847
Dept: Economics
Course code:Eco 324
Date:8/02/2022
Assignment
(1)Discuss how financial intermediaries perform these functions in more details
Answer:
A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.[1][2]

Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities.[2] As such, financial intermediaries channel funds from people who have surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors).[3]

A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly.[4] That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans or mortgages.[5] Alternatively, they may lend the money directly via the financial markets, and eliminate the financial intermediary, which is known as financial disintermediation.

In the context of climate finance and development, financial intermediaries generally refer to private sector intermediaries, such as banks, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.[6] Increasingly, international financial institutions provide funding via companies in the financial sector, rather than directly financing projects.[7]

Functions performed by financial
performed by financial intermediaries
The hypothesis of financial intermediaries adopted by mainstream economics offers the following three major functions they are meant to perform:

Creditors provide a line of credit to qualified clients and collect the premiums of debt instruments such as loans for financing homes, education, auto, credit cards, small businesses, and personal needs.
Risk transformation
Convenience denomination
Advantages and disadvantages of financial intermediaries
There are two essential advantages from using financial intermediaries:

Cost advantage over direct lending/borrowing[citation needed]
Market failure protection; The conflicting needs of lenders and borrowers are reconciled, preventing[citation needed] market failure
The cost advantages of using financial intermediaries include:

Reconciling conflicting preferences of lenders and borrowers
Risk aversion intermediaries help spread out and decrease the risks
Economies of scale – using financial intermediaries reduces the costs of lending and borrowing
Economies of scope – intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)
Various disadvantages have also been noted in the context of climate finance and development finance institutions.[6] These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.[8]

(2)Clearly discuss the benefits of the consolidation and the failures (if any).
Consolidation is one of the trends that characterize banking industry restructuring in Nigeria. However, the emerging scale of bank mergers raises challenging policy questions that must be addressed by policy makers in the course of promoting economic efficiency while safeguarding the nation’s financial system. This paper analyses the challenges of the banking consolidation to the Central Bank of Nigeria (CBN). The paper is descriptive and uses literature survey method. Data was collected from secondary source through CBN publications, local and international journals and other published materials. The paper argues that the recent consolidation poses new challenges to the regulatory authority, particularly in the area of financial system stability. It therefore, recommends that CBN’s policies aimed at providing financial system stability and efficiency should take into consideration the process of banking consolidation and increasing globalisation of financial transactions.
Benefits of consolidation:

1. Repay debt sooner
Taking out a debt consolidation loan may help put you on a faster track to total payoff, especially if you have significant credit card debt. Credit cards don’t have a set timeline for paying off a balance, but a consolidation loan has fixed payments every month with a clear beginning and end to the loan.

Takeaway: Repaying your debt faster means you may pay less interest overall. In addition, the quicker your debt is paid off, the sooner you can start putting more money toward other goals, such as an emergency or retirement fund.

2. Simplify finances
When you consolidate all of your debt, you no longer have to worry about multiple due dates each month because you only have one payment. Furthermore, the payment is the same amount each month, so you know exactly how much money to set aside.

Takeaway: Because you use the loan funds to pay off other debts, debt consolidation can turn two or three payments into a single payment. This can simplify budgeting and create fewer opportunities to miss payments.

3. Get lower interest rates
As of November 2021, the average credit card rate is around 16 percent. Meanwhile, the average personal loan rate is below 11 percent. Of course, rates vary depending on your credit score and the loan amount and term length, but you’re likely to get a lower interest rate with a debt consolidation loan than what you’re currently paying on your credit card.

Takeaway: Debt consolidation loans for consumers who have good to excellent credit typically have significantly lower interest rates than the average credit card.

4. Have a fixed repayment schedule
If you use a personal loan to pay off your debt, you’ll know exactly how much is due each month and when your very last payment will be. Pay only the minimum with a high interest credit card and it could be years before you pay it off in full.

Takeaway: By having a fixed repayment schedule, your payment and interest rate remain the same for the length of the loan, there’s no unexpected fluctuation in your monthly debt payment.

5. Boost credit
While a debt consolidation loan may initially lower your credit score slightly since you’ll have to go through a hard credit inquiry, over time it will likely improve your score. That’s because it’ll be easier to make on-time payments. Your payment history accounts for 35 percent of your credit score, so paying a single monthly bill when it’s due should significantly raise your score.

Additionally, if any of your old debt was from credit cards and you keep your cards open, you’ll have both a better credit utilization ratio and a stronger history with credit. Amounts owed account for 30 percent of your credit score, while the length of your credit history accounts for 15 percent. These two categories could lower your score should you close your cards after paying them off. Keep them open to help your credit score.

Takeaway: Consolidating debt can ultimately improve your credit score compared to not consolidating. This is particularly true if you make on-time payments on the loan, as payment history is the most important factor in the calculation of your score.

4 key drawbacks of debt consolidation
There are also some downsides to debt consolidation that you should consider before taking out a loan.

1. It won’t solve financial problems on its own
Consolidating debt does not guarantee that you won’t go into debt again. If you have a history of living beyond your means, you might do so again once you feel free of debt. To help avoid this, make yourself a realistic budget and stick to it. You should also start building an emergency fund that can be used to pay for financial surprises so you don’t have to rely on credit cards.

Takeaway: Consolidation can help you pay debt off, but it will not eliminate the financial habits that got you into trouble in the first place, such as overspending or failing to set aside money for emergencies. You can prevent more debt from accumulating by laying the groundwork for better financial behavior.

2. There may be up-front costs
Some debt consolidation loans come with fees. These may include:

Loan origination fees.
Balance transfer fees.
Closing costs.
Annual fees.
Before taking out a debt consolidation loan, ask about any and all fees, including those for making late payments or paying your loan off early. Depending on the lender that you choose, these fees could be hundreds if not thousands of dollars. While paying these fees may still be worth it, you’ll want to include them in deciding if debt consolidation makes sense for you.

Takeaway: Do you research and read the fine print carefully when considering debt consolidation loans to make sure you understand their full costs.

3. You may pay a higher rate
Your debt consolidation loan could come at a higher rate than what you currently pay on your debts. This could happen for a variety of reasons, including your current credit score.

“Consumers consolidating debt get an interest rate based on their credit rating. The more challenged the consumer, the higher the cost of credit,” says Michael Sullivan, personal financial consultant for Take Charge America, a nonprofit credit counseling and debt management agency.

Additional reasons you might pay more in interest include the loan amount and the loan term. Extending your loan term could get you a lower monthly payment, but you may end up paying more in interest in the long run.

As you consider debt consolidation, weigh your immediate needs with your long-term goals to find the best solution.

Takeaway: Consolidation does not always end up reducing the interest rate on your debt, particularly if your credit score is less than ideal.

4. Missing payments will set you back even further
If you miss one of your monthly loan payments, you’ll likely have to pay a late payment fee. In addition, if a payment is returned due to insufficient funds, some lenders will charge you a returned payment fee. These fees can greatly increase your borrowing costs.

Also, since lenders typically report a late payment to the credit bureaus after it becomes 30 days past due, your credit score can suffer serious damage. This can make it harder for you to qualify for future loans and get the best interest rate.

To reduce your chances of missing a payment, enroll in the lender’s automatic payment program if it has one.

(3)risks faced by banks are enormous, clearly discuss the risks and how they can be mitigated.
Answer:

Major risks for banks include credit, operational, market, and liquidity risk. Since banks are exposed to a variety of risks, they have well-constructed risk management infrastructures and are required to follow government regulations. Government agencies, such as the Office of Superintendent of Financial Institutions (OSFI) in Canada, set the regulations to counteract risks and protect depositors.

Why Do the Risks for Banks Matter?
Due to the large size of some banks, overexposure to risk can cause bank failure and impact millions of people. By understanding the risks posed to banks, governments can set better regulations to encourage prudent management and decision-making.

The ability of a bank to manage risk also affects investors’ decisions. Even if a bank can generate large revenues, lack of risk management can lower profits due to losses on loans. Value investors are more likely to invest in a bank that is able to provide profits and is not at an excessive risk of losing money.

Summary
The major risks faced by banks include credit, operational, market, and liquidity risks.
Prudent risk management can help banks improve profits as they sustain fewer losses on loans and investments.
Ways to decrease risks include diversifying assets, using prudent practices when underwriting, and improving operating systems.

Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.

While banks cannot be fully protected from credit risk due to the nature of their business model, they can lower their exposure in several ways. Since deterioration in an industry or issuer is often unpredictable, banks lower their exposure through diversification.

By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. To lower their risk exposure, they can loan money to people with good credit histories, transact with high-quality counterparties, or own collateral to back up the loans.

Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra $50 bill to a customer.

On a larger scale, fraud can occur through breaching a bank’s cybersecurity. It allows hackers to steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make it more difficult to attract deposits or business in the future.

Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.

Commodity prices also play a role because a bank may be invested in companies that produce commodities. As the value of the commodity changes, so does the value of the company and the value of the investment. Changes in commodity prices are caused by supply and demand shifts that are often hard to predict. So, to decrease market risk, diversification of investments is important. Other ways banks reduce their investment include hedging their investments with other, inversely related investments.

Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.

Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers. Mismanagement of asset-liability duration can also cause funding difficulties. This occurs when a bank has many short term liabilities and not enough short-term assets.

Short-term liabilities are customer deposits or short-term guaranteed investment contracts (GICs) that the bank needs to pay out to customers. If all or most of a bank’s assets are tied up in long-term loans or investments, the bank may face a mismatch in asset-liability duration.

Regulations exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid assets to survive for a period of time even without the inflow of outside funds.

(4)Assuming you are the current CBN governor and Mr. President tells you to write a position paper and justify why AMCON should continue to exist as a Corporation, what will you tell Mr. President.
Answer
AMCON should countinue to exist because of this acts governing it affairs:
The Asset Management Corporation of Nigeria (AMCON) was established by an Act of the National Assembly on July 19th 2010, primarily to resolve the nation�s banking sector crisis and restore stability to its economy. It purports to do so by purchasing Non-Performing Loans from eligible financial institutions and effectively managing or disposing of them. However, the issue arises from the fact that the Act grants notably wide and novel powers in its bid to achieve its objects. This consequently results in significant legal implications on the key players involved, particularly legal practitioners, the judiciary, eligible financial institutions and even debtors. Additionally, the AMCON Practice Directions 2013, by providing for updated terminology and special debt recovery procedures, ensures that court proceedings are concluded as speedily and efficiently as possible. This article seeks to discuss the effect of these laws on different classes of affected persons and furthermore, to investigate the constitutionality of some of their provisions.

The AMCON Practice Directions 2013 have introduced several novel procedures that affect the legal practitioners engaged in AMCON matters and the Judges presiding over them. In particular, Part V provides that all proceedings initiated by an AMCON claim should hold every working day of the week with the aim of concluding the trial and final addresses within 3 months from the date the claim was started. This is in contrast with the average litigation process that stretches over months and sometimes even years before judgment is delivered. However, AMCON being a time-bound institution cannot enjoy the luxury of over extended adjournments and hence, requires an urgent approach.

Furthermore, the Practice Directions minimize the significance of technical irregularities. Formal defects that ordinarily may be cause for a suit to be thrown out, may, upon direction and at the discretion of the Judge, be amended and regularized[1]. In a similar manner, a claim filed in the wrong jurisdiction is not immediately invalidated and the presiding Judge may choose to proceed with the matter regardless[2]. The court may even validate substituted service done without appropriate permission[3] and proof of service may also not be necessary in particular circumstances. For example, if the party or counsel to be served admits to service or appears in court in response to the served document and is in possession of it, the requirement to file an affidavit, certificate or statement as to service may be negated[4]. All these special procedures are set in place to ensure justice is attained in a timely fashion. Hence, it is imperative that lawyers and judges alike work diligently and cohesively, through active case management or otherwise, to achieve this fundamental objective.

However, of great pertinence to all parties involved is a powerful tool provided under Part 13 of the AMCON Practice Directions 2013. This part permits interim orders to be granted at any time before proceedings have even been initiated and even after judgment. This is particularly significant regarding the powers granted under Sections 49 and 50 of the AMCON Act that provide for orders for possession of property and for freezing of bank accounts respectively to be granted against the debtor.

�49.

Where the Corporation has reasonable cause to believe that a debtor or debtor company is the bona fide owner of any movable or immovable property, it may apply to the Court by motion ex-parte for an order granting possession of the property to the Corporation
The Corporation shall serve a certified true copy of the order of the Court issued pursuant to subsection (1) of this section on the debtor or debtor company.
The Corporation shall commence debt recovery action against the debtor or debtor company in respect of whose property an order subsists pursuant to subsection (1) of this section within 14 days from the date of the order, failing which the order shall lapse.
50.

Where the Corporation has reasonable cause to believe that a debtor or debtor company has funds in any account with any eligible financial institution, it may apply to the Court by motion ex-parte for an order freezing the debtor or debtor company�s account.
The Corporation shall commence debt recovery action against a debtor or debtor company whose account has been frozen by a Court Order issued under subsection (1) of this section within 14 days from the date of the order, failing which the order shall lapse.�
From the above sections, it is clear that the sole prerequisite for these orders is that there should be reasonable cause to believe the debtor or debtor�s company is the bona fide owner of any property or funds in any bank account. The implication is that once a debt is acquired from an eligible financial institution, AMCON may obtain such court orders without notice of the suit even being served on the obligor and possibly without any prior attempts at negotiation. Additionally, these Orders would be enforceable throughout the duration of the suit if AMCON commences debt recovery action within 14 days from the date the Order was issued.

Regarding this situation, one might rightly argue that the abrupt possession of property and/or bank funds work against Section 44 of the Constitution of the Federal Republic of Nigeria 1999 (CFRN) that guarantees a citizen�s right to moveable and immoveable property. Although Section 44 (2) provides a range of exceptions to this right, including financial obligations arising out of contracts, the Civil Procedure Rules of each state have laid down well-established methods of enforcing such agreements while also seeking to protect the rights of the obligor as much as possible. For example, under Order 7 Rule 2 of the Abuja Civil Procedure Rules 2004, �a motion ex parte shall be supported by an affidavit stating sufficient grounds why delay in granting the Order sought would entail irreparable damage or serious mischief to the party moving�. This provision is essential because it serves as a measure to ensure that appropriate caution is taken before the obligor�s rights are abrogated.

Furthermore, the Abuja Civil Procedure Rules make provision for the party affected by the Order to apply to the court to vary or discharge it within 7 days of service of the Order and even without any such application, the Order will naturally lapse after 14 days. Likewise, by virtue of Order 26 Rule 12(2) of the Federal High Court (Civil Procedure) Rules, 2009 an order made on motion ex parte will automatically lapse after 14 days. Hence, for the Order to last the duration of the suit, the application must be brought by motion on notice and this, thereby, gives the affected party an opportunity to be heard. Unfortunately, there are no similar provisions in the AMCON Practice Directions 2013 and for the entirety of the suit, the obligor may also be denied his right of being heard before a Court of Law. This appears to be in contravention to Section 36 (1) CFRN that guarantees a person is properly heard before a decision affecting him/her is made.

Conversely, it may be argued that this abrogation of rights is for a brief period of approximately three (3) months and not a final decision. However, does the short duration of the suit justify the deprival of interests guarded by the Constitution? In the case of 7up Bottling Company Ltd. vs. Abiola & Sons Ltd, Uwais JSC stated that there are certain steps that are only ancillary to the substantive case such as interim and interlocutory injunctions. These �orders to be made by the Court, unlike final decisions, are temporary in nature so they do not determine the civil rights and obligations of the parties in the proceedings as envisaged by the Constitution� (Pg. 280). This decision was upheld in Esai Dangabar vs Federal Republic of Nigeria where the Court held that the grant of an ex parte application was not in breach of the fundamental right to a fair hearing. In this case, the interim attachment of assets was held to be simply for its preservation pending the final determination of the case where the final decision on the confiscation or acquittal of the properties as the case may be will be made. Hence, according to Nigerian case law, as publicly controversial as the provisions of the AMCON Act may be, it may still be within the confines of the CFRN. Consequently, debtor or debtor companies and their legal representatives are advised to resolve their debts through negotiations before such drastic actions are initiated against them.

Nonetheless, however, the extent of the broad powers granted to AMCON may be observed even further under Section 48 of the AMCON Act:

The Corporation shall have power to act as, or appoint a receiver for, a debtor company whose assets have been charged, mortgaged, pledged as security for an eligible bank asset acquired by the Corporation.
A receiver under this Act shall have power to:
(a) realize the assets of the debtor company;
(b) enforce the individual liability of the shareholders and directors of the debtor company; and
(c) manage the affairs of the company�
This ability to act as or appoint a receiver for such a debtor company without any reference to the Court is generally viewed as problematic and may raise similar issues of breach of constitutional rights. Albeit Section 392 of the Companies and Allied Matters Act (CAMA) 1990 provides that the appointment of such a receiver should be notified to the Corporate Affairs Commission (CAC), this does little to secure the interests of the debtor company. As it is an appointment done outside the court, the AMCON Practice Directions 2013 also doesn�t provide any clarification on the procedure to be utilized for this appointment, the criteria for appointment or how/if the debtor company will be notified. Although the urgency of AMCON necessitates such drastic actions, it is also apparent that this is power is readily available to it once the assets of the obligor company have been charged as security for a loan. Hence, debtor companies should take heed and try to settle any outstanding debts as quickly as possible.

On the other hand, as an eligible financial institution selling bank assets to AMCON, there are also certain note worthy obligations and implications that arise from such a sale. By Section 34 of the AMCON Act, all the rights, powers and obligations accruing to the eligible financial institutions as creditors to the debtors automatically cease once acquired by AMCON and are, thence, vested in the Corporation. Also, upon request from the Corporation, such institutions are required to give the necessary assistance in legal proceedings involving bank assets acquired from them. This may take the form of making available vital documents or witnesses that could help their case[5]. These steps are paramount for the Corporation to achieve its objects of effectively disposing of its acquired assets.

Moreover, however, the AMCON Act contains safety provisions against any liability that may be incidentally acquired along with the bank asset. Eligible financial institutions are required to enter into a purchase agreement with AMCON that indemnifies the Corporation against any loss that may be suffered by it if the collateral is invalid or unenforceable[6]. AMCON may equally direct that it be indemnified against any loss resulting from �any error, omission or mis-statement in any information or certificate provided to the Corporation�[7]. Furthermore, the financial institutions are solely liable for any damages sought by the debtor arising from the failure to disclose any obligation that the financial institution made in favour of the debtor or failure to record any note particularizing the consideration already paid by the debtor[8]. Therefore, from the above provisions, it is apparent that eligible financial institutions selling off their bank assets enter into a continuing relationship with AMCON until those bank assets are adequately disposed of. In order to reduce their liability, it is imperative for these financial institutions to conduct their affairs with their debtors and with AMCON diligently and in good faith.

In conclusion, the AMCON Act and the AMCON Practice Directions have introduced several novel provisions that affect the way debtors, financial institutions, their lawyers and judges interact with each other in the enforcement of debts. While the fundamental aim of the Practice Directions is the speedy dispensation of justice, we have investigated how their execution simultaneously borderlines the infringement of certain constitutional rights. In a similar manner, the primary objective of the AMCON Act is to assist eligible financial institutions in the effective disposal of its bank assets. However, the Act opens up various new avenues of liability for these financial institutions. Hence, it is important for all parties concerned to fully acquaint themselves with these new provisions so as to place themselves in the best position when dealing with AMCON.

NAME: MBA COLLINS CHIDUMEBI
REG NO.: 2018/242336
DEPARTMENT: ECONOMICS
COURSE: ECO 324 FINANCIAL MARKETS AND INSTITUTIONS
Discussion Quiz 3: Financial Intermediaries, Banks and AMCON
Discuss how financial intermediaries reconcile the conflicting preferences of lenders and borrowers and also how they help to spread out or decrease risk.
One of the roles of financial intermediaries is to reconcile conflict of interest between lenders and borrowers. When loans are given out for say, a project, the lender cannot be sure that the borrower will put in enough work to make the project a success. If the borrower does not put any of his money into the project and the project fails, it is the lender not the borrower, who loses as the loan may not be repaid. Additionally, the borrower may have more information regarding the success of the project. These problems also tend to push up the user cost of capital, which increases the cost of borrowing for the borrower. These problems arise due to differences in the preferences of the lender and borrower and differences between information regarding the project, available to both parties (lender and borrower).
The lender will want to avoid the risk of losing his money; in the case of a failed project and the borrower will want to get the best possible terms of loan repayment. One way financial intermediaries-like banks- settle this conflict is to get the borrower to deposit some of his wealth into the project. This will ensure the alignment of the lender and borrower interest. Another common way to align lender and borrower preferences is the use of collateral as a requirement for loan disbursement. Here, what is required of the borrower is to set aside property that will be transferred to the lender, if the borrower defaults in repayment. By adopting these two simple measures, financial intermediaries are able to reconcile the conflicting preferences of lenders and borrowers.

Financial intermediaries like insurance companies help spread out risk through a process called `Reinsurance`. Reinsurance occurs when different insurance companies buy insurance policies from other insurers so as to limit total loss in the event of widespread catastrophe. By this act of spreading risk, an insurance company is able to take on clients whose coverage will be too great for the company to handle alone. If one company assumes the risk on its own, the cost could potentially bankrupt or financially ruin the insurance company and may not cover the loss for the insured. Firms involved in reinsurance tend share the insurance premiums paid by the insured. The idea behind pooling risk or spreading risk is to ensure that no insurance company is too exposed to a catastrophic event or phenomenon.
Selling insurance coverage for the same risk in a single neighbourhood can cause financial problem if a local event results in massive number of claims. For instance, suppose a company sells flood insurance to homeowner s in a single area. If that region experiences a flood, they may be an immense number of claims which may overwhelm the finances of the insurance company. Hence, insurance companies should sell out insurance coverage for flood to homeowners living in different areas. So, in the event of a disaster they will be able to cover the claims made by those affected; by the premiums of those not affected by the occurrence.
Clearly discuss the benefits of the CBN consolidation of 2004 and the failures (if any).
The period 1990s was a troublesome one for Nigerian commercial banks, amidst a rise in bank distresses and failures. These developments along with malignant inflation, persistent economic downturn coupled with heightened political instability, resulted in a very toxic financial environment. The CBN then stepped in to strengthen the Nigerian financial system by initiating commercial bank consolidation in 2004. The program was a colossal success. In addition to whittling down the number of banks in the system, it also made sure that the remaining banks are strong and able to compete globally. Some of the achievements of the consolidation program are:
Reducing the number of banks to twenty-five healthy and reliable banks.
As a result of the program, fourteen Nigerian banks made it to the world top 1000 banks, while two made the world top 300.
Nigerian banks now have the wherewithal to compete for mega businesses, including airline business.
Borrowing abroad was made easier, as Nigerian banks are now able to guarantee it.
The number of commercial banks in Nigeria was further reduced in recent times, owing to other mergers and acquisitions that have taken place after the financial crisis.
Clearly discuss the risks faced by banks and how they can be mitigated.
CREDIT RISK: This occurs when borrowers and counterparts fail to meet their contractual obligations. It is the biggest risk faced by banks. An example is when borrowers default on payment of loan principal or interest.
To lower this risk, banks adopt what is called diversification. Here, to lower credit risk exposure they can loan money to individuals with good credit history, transact with high-quality counterparts, or own collateral to back up the loans.
OPERATIONAL RISK: This is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. This risk is lower for simple business operations like retail banking and asset management, and greater for operations like sales and trading. Losses can also occur due to human error, e.g. crediting a wrong account in error. On a much larger scale, banks can be defrauded through the breaching of their cyber security.
This risk can be mitigated through digitalization; banks can decrease human intervention in many transactions and thus, contain employee error and fraud risk. Another way is by restructuring the bureaucratic structure of the bank for leaner and agile ways of working in order to detect and respond to errors quickly.
MARKET RISK: This occurs mostly as a result of a bank`s activity in the capital market. It is due to the unpredictable nature of equity markets, commodity prices, interest rates etc. Banks are more exposed if they are heavily involved in investing in capital market or sales and trading.
This risk can be lessened by diversification of investment. Another way banks can reduce this risk is by hedging their investments with other inversely related investment.
LIQUIDITY RISK: Liquidity refers to the ability of a bank to access cash to meet funding obligations. The inability of banks to provide cash in timely manner to customers can trigger a negative chain reaction. If a bank delays in providing cash to few of their customers for a day, other customers may lose confidence in the bank and rush to take out their deposits; which further lowers the bank`s ability to provide funds.
This risk can be mitigated with a regulation that requires banks to hold enough liquid assets to survive for a period of time without the inflow of outside funds.

Write a position letter and justify why AMCON should continue to exist to Mr. President.
Mr. President, AMCON was established in order to help banks with issues of non-performing loans. It was created to be a key re-vitalizing and stabilizing tool to revive the financial system by efficiently and effectively resolving the issues of non-performing loans and insolvency in the Nigerian financial system. I understand that the corporation was set up to exist for a decade. The corporation has been able to correct some defects in the Nigerian banking sector through their intervention; hence achieving the objectives for which it was created. But the financial system is a highly volatile sector and there are several factors that can spring up to bring up some other variants of the issues that AMCON was meant to solve. If AMCON no-longer exist when these issues spring up, who will right the disturbances that will be caused in the financial system, as a result of these issues? In the light of all these, I humbly request Mr. President to extend the existence of AMCON.