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Pricing may Hinder Acquisition of Banks Bad Assets
- By Bukola Idowu
- Published February 22nd, 2010
- MoneyWorld
- Unrated
AS the banking sector continues to undergo restructuring, pricing could be a major constraint hindering the smooth buy over of the bad assets of the eight troubled banks by the proposed Asset Management Company (AMC).
According to Dr. Emmanuel Abolo, chief economist and head group market risk management of Access Bank Plc, pricing of assets would be a contentious issue once the AMC bill is passed into law.
Abolo, while speaking at a public discourse organized by Financial Correspondents Association of Nigeria (FICAN) in Lagos last week, said assets are “either marked to market or marked to model.”
He noted that in a situation where there is no market price for an asset, it is marked to model, adding that the question of which model to use would be one that may arise.
Highlighting the benefits of the AMC, Abolo said the company would reduce chances of systemic risk and thus promotes greater level of confidence between banks.
He stated that the AMC would also create “greater access to international funding markets for domestic banks from improved perceptions by international investors and rating agencies.”
Noting that it would help fuel the recovery of the capital market, Abolo said the AMC also underscores the willingness of government to maintain a proactive approach to dealing with the crisis.
Abolo opined that the market views the sale of loans to AMCON positively as definite break for the banking sector from underperforming assets, adding that “focusing Asset Management Company of Nigeria (AMCON) on equity-linked loans assists the revival of equity capital markets as the banks focus on growth once more.”
On restructuring the sector, Abolo said “the first task in financial restructuring is the estimation of non-performing loans (NPLs) and the identification of best possible ways for their resolution.
He said while NPLs are a useful indicator of bank performance, “their true meaning depends on the method of their estimation. In a crisis, NPLs are found in large scale, which makes restructuring require large financial assistance.
“Further, the accumulation of NPLs deteriorates profitability of financial institutions and makes them more cautious in liquidity provision due to a lowered capital adequacy ratio. A well-designed and operated financial infrastructure can lead to higher efficiency in financial intermediation”, He stated.
He added that this “essentially enables financial institutions to provide better services at a lower cost, and customers to enjoy high return at a lower risk.”
Stating that the key components of financial sector infrastructure include legal system for supervision, bankruptcy, foreclosure, central bank monetary policy, and bank secrecy; accounting and disclosure standards; data collection and dissemination; payments system; deposit insurance; asset management companies; and human resources development, he said the set-up of bankruptcy and foreclosure laws is also required to encourage financial and corporate sector restructuring.
He also noted that the sequencing of reforms problem must be dealt with, adding that different weights may be placed on each of the above based on the urgency for implementation. “For example, the mitigation of liquidity problems may come first, as it is the most urgent issue, followed by other policy issues including the resolution of NPLs and consolidation of the banking industry”, he said.
Noting that the knowledge of risk management in the country is low, Abolo said there is a need to establish a risk management school “to train both regulators and bank staff to strengthen skills and competencies.”
According to Dr. Emmanuel Abolo, chief economist and head group market risk management of Access Bank Plc, pricing of assets would be a contentious issue once the AMC bill is passed into law.
Abolo, while speaking at a public discourse organized by Financial Correspondents Association of Nigeria (FICAN) in Lagos last week, said assets are “either marked to market or marked to model.”
He noted that in a situation where there is no market price for an asset, it is marked to model, adding that the question of which model to use would be one that may arise.
Highlighting the benefits of the AMC, Abolo said the company would reduce chances of systemic risk and thus promotes greater level of confidence between banks.
He stated that the AMC would also create “greater access to international funding markets for domestic banks from improved perceptions by international investors and rating agencies.”
Noting that it would help fuel the recovery of the capital market, Abolo said the AMC also underscores the willingness of government to maintain a proactive approach to dealing with the crisis.
Abolo opined that the market views the sale of loans to AMCON positively as definite break for the banking sector from underperforming assets, adding that “focusing Asset Management Company of Nigeria (AMCON) on equity-linked loans assists the revival of equity capital markets as the banks focus on growth once more.”
On restructuring the sector, Abolo said “the first task in financial restructuring is the estimation of non-performing loans (NPLs) and the identification of best possible ways for their resolution.
He said while NPLs are a useful indicator of bank performance, “their true meaning depends on the method of their estimation. In a crisis, NPLs are found in large scale, which makes restructuring require large financial assistance.
“Further, the accumulation of NPLs deteriorates profitability of financial institutions and makes them more cautious in liquidity provision due to a lowered capital adequacy ratio. A well-designed and operated financial infrastructure can lead to higher efficiency in financial intermediation”, He stated.
He added that this “essentially enables financial institutions to provide better services at a lower cost, and customers to enjoy high return at a lower risk.”
Stating that the key components of financial sector infrastructure include legal system for supervision, bankruptcy, foreclosure, central bank monetary policy, and bank secrecy; accounting and disclosure standards; data collection and dissemination; payments system; deposit insurance; asset management companies; and human resources development, he said the set-up of bankruptcy and foreclosure laws is also required to encourage financial and corporate sector restructuring.
He also noted that the sequencing of reforms problem must be dealt with, adding that different weights may be placed on each of the above based on the urgency for implementation. “For example, the mitigation of liquidity problems may come first, as it is the most urgent issue, followed by other policy issues including the resolution of NPLs and consolidation of the banking industry”, he said.
Noting that the knowledge of risk management in the country is low, Abolo said there is a need to establish a risk management school “to train both regulators and bank staff to strengthen skills and competencies.”
