Academic journal article Journal of Financial Management & Analysis

Global Financial Crisis and Bank Management Practices in Nigeria : Survey Findings

Academic journal article Journal of Financial Management & Analysis

Global Financial Crisis and Bank Management Practices in Nigeria : Survey Findings

Article excerpt

Introduction

The recent 2007-2008 Global Financial Crisis has obviously exposed the lapses in our understanding of bank management. One fundamental cause of me crisis was a change in the business model of banking, mixing credit with equity culture. Coupled with a poor regulatory framework, the current crisis became inevitable. Stiglitz1 has argued that America's financial system failed in its two crucial responsibilities: managing risk and allocating capital. It is also argued that failures in financial markets have come about because of poorly designed incentive structures, inadequate competition, and inadequate transparency.

The global banking system has seen more than US $20billion write-downs since the beginning of the financial markets crisis in 2007 (Omofaye)2. The developed markets have been worse hit, especially the big banks such as Citigroup (more than US $24billion), Merrill Lynch (aboutUS $ 25billion), UBS (more than US $27billion). A report by Komolafe quoted the International Monetary Fund (IMF) as stating recently that losses tied to distressed loans and securitized assets occasioned by the recent crisis would reach US $4.1 trillion by the end of 2010 as the recession and credit crisis exact a higher toll on financial institutions. It is expected mat banks will shoulder about 61 per cent of the write-downs, while insurers, pension funds, and other nonbanks would assume the rest.

The emergence of internationally active banks in Nigeria, including the internationalization of the stock market have provided definite channels through which the 2007-2008 Global Financial Crisis is impacting on the balance sheets of Deposit Money Banks. Egwuoniso has shown recently how banks in Nigeria balance risk assets with strong capital and collaterized lending:

In total, the estimated bad debts in the industry is put at N 1 .2trillion but the capital base as at December 2008 was over N4trillion, which leaves the industry with a balance of over N3 trillion even if they have to write off all by virtue of provisioning requirements3.

Bank management is defined as the simultaneous planning of all asset and liability positions on the bank's balance sheet under consideration of the different bank objectives and legal, managerial and market constraints, for the purpose of mitigating interest rate risk, providing liquidity and enhancing the value of die firm. The critical question is: What should be the composition of a bank's assets and liabilities on average given the corresponding returns and costs, in order to achieve certain goals, such as the maximization of the bank's gross revenue? This need has led banks to determine their optimal balance among profitability, risk, liquidity and other uncertainties. The optimal balance between these factors cannot be found without considering important interactions that exist between the structure of a bank's liability and capital and the composition of its assets. Asset and Liability Management (ALM), as Bank Management is often called, is heavily dependent on the movement of interest rates in the market. The history of ALM suggests that it is very important for a financial institution to measure, manage and control interest rate risk.

In the past, mathematical models have been extensively applied in resolving the cross purposes of liquidity and profitability within a risk-return framework. The works of Toby4 highlight the liquidity management practices of Nigerian banks in response to the policy shocks that characterized the banking distress era (1993-2003). The current study surveys actual bank management practices in the period of the 2007-2008 Global Financial Crisis. The empirical relationships observed would assist both academics and practitioners to redefine bank management under global economic uncertainty.

The major research questions in this study are

* What factors impacted most on banks' liquidity profiles in the wake of the 2007-2008 Global Financial Crisis? …

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