A positive and normative analysis of bank supervision in Nigeria

Financial liberalization, apart from increasing the number and varieties of financial institutions, also brought about increased distress in the financial system. As at 1995, there were reports that 60 out of 115 surviving banks (52.2%) were distressed. A very high proportion of non-bank financial institutions was also distressed. Because of the ensuing competition resulting from financial liberalization, the use of non-price strategies to attract customers became prominent. This led to a lot of adverse selection and incentive problems culminating in a high rate of non-performing loans, default and insolvency within the financial system. The need to have better understanding of the nature and determinants of the supervisory and regulatory agencies’ decisions in the early identification of non-healthy from healthy banks, therefore, becomes quite useful. This constitutes the main focus of this study. To address this, the study identified the nature and determinants of bank supervisory decision in Nigeria, and evaluated the current early warning system (EWS) and its alternative candidate for managing distress in Nigeria. This study found that the existing institutional and legal infrastructure for bank supervision in Nigeria is one of the best in Sub-Saharan Africa. The political authorities, however, appear rather slow in implementing the recommendations of the supervisory and regulatory authorities as regards the resolution of bank distress. The incentive structure at different levels of the system can induce a dampening effect on the operations of the supervisory and regulatory system, including the recommendations of the regulatory agencies, if it is not compatible. It recommended an in-depth and rigorous study of the incentive structure of the system with a view to designing a competitive structure that will facilitate effective supervision. It also suggested that supervisory and regulatory authorities use those significant determinants of distress identified by the study in targeting banks for closer monitoring and supervision.