AHAM NZENWATA
1 INTRODUCTION
In every system, there are major components that feature
dominantly for the survival of the system. Within the financial system, banks
play this dominant role contributing significantly to the effectiveness of the
entire financial system as they offer an efficient institutional mechanism
through which resources can be mobilized and directed from less essential uses
to more productive investment’s (Moore, 2009).
In the performance of this financial inter-mediatory role,
the banking institutions have proved to be an effective channel between savers
and borrowers. Among the banking institutions that perform these roles,
commercial banks have proven themselves to be the most important as they handle
a vast majority of the daily financial transactions in the system. They
function as retail banking units facilitating the transfer of financial assets
that are well desired from some part of the public (surplus units) into other
financial assets which are more widely preferred by greater part of the public
(deficit units).
In support of this argument, Ebhodaghe (2015) assert that
banks are generally known to hold the bulk of the money supply in an economy.
They also create money through the loans and advances they extend to their
customers. Banks act as the vehicles of implementing monetary policies and they
intermediate between the surplus and deficit units of the economy. As a result
of these sensitive activities of gathering of deposits and allocation of
credits, banks are vulnerable to liquidity problems and loss of public
confidence.
Olashore (1988) in Anyanwaokoro (2008) observe that the
magnitude of customers’ funds involved (in
banking activities) and the tremendous impact that misuse or fraud could
have on public confidence and hence the economy make the regulation of bank
operations necessary.
From the foregoing, it can be deduced that the activities of
banks are central to the survival of any market driven economy. Thus, the
failure of a bank within the economy will likely have very costly repercussions
for the entire system. It is for these reasons that governments usually desire
to control the banking industry more than any other sector of an economy.
Government through its agencies like the Central bank
control the activities of banks by making policies. Such policies are targeted
at activities of the banks which are recognized as being very important to
their survival and continued existence. In the next section, we shall highlight
some of these important areas of banking activities the are targeted for
control by the regulatory authorities.
2.1 Reserves and Liquidity Requirements:
The reserve requirement sets the minimum reserves each bank
must hold to demand deposits and banknotes. Banks are expected at all times to
have enough cash or near-cash assets to enable them repay their depositors on
demand.
The emphases in contemporary banking has moved towards
capital adequacy ratios as a more appropriate measure of a banks ability to
settle its depositors demand and in many countries there is no minimum reserve
ratio. The purpose of minimum reserve ratios is liquidity rather than safety.
Reserve requirements have also been used in the past to
control the stock of banknotes and/or bank deposits. Required reserves have at
times been gold, central bank banknotes or deposits, short-term securities and
foreign currency.
2.2 Capital Requirements:
According to Anyanwaokoro (2008), Banks are expected to be
adequately capitalized at all times. The capital requirement sets a framework
on how banks must handle their capital in relation to their assets. In addition
to the capital requirements, banks are also expected have a healthy Capital
Adequacy Ratios in relation to the size of business they do. A well capitalized
bank having healthy capital adequacy ratios is less likely to find itself in
distress hence the need for the governemtn to closely monitor banks in order to
endure that they maintain healthy capital requirements.
Internationally, the Bank for International Settlements'
Basel Committee on Banking Supervision influences each country's capital
requirements. In 1988, the Committee decided to introduce a capital measurement
system commonly referred to as the Basel Capital Accords.
2.3 Financial Reporting and Disclosures:
Among the most important critical areas that governments
scrutinize in order to control the activities of banks is the requirement for
disclosure of the bank's finances. Particularly for banks that trade on the
public market. In Nigeria for example the Securities and Exchange Commission
(SEC) requires management of baks to prepare annual financial statements
according to the International Financial Reporting Standard (IFRS), have them
audited, and to register or publish them. Often, these banks are even required
to prepare more frequent financial disclosures, such as Quarterly Disclosure
Statements.
In addition to preparing these statements, the SEC also
stipulates that directors of the bank must attest to the accuracy of such
financial disclosures. Thus, included in their annual reports must be a report
of management on the company's internal control over financial reporting. The
internal control report must include:
· A statement of management's responsibility
for establishing and maintaining adequate internal control over financial
reporting for the company;
· Management's assessment of the
effectiveness of the company's internal control over financial reporting as of
the end of the company's most recent fiscal year;
· A statement identifying the framework
used by management to evaluate the effectiveness of the company's internal
control over financial reporting;
· A statement that the registered public
accounting firm that audited the company's financial statements included in the
annual report has issued an attestation report on management's assessment of
the company's internal control over financial reporting.
Furthermore, a bank is required to file the registered
public accounting firm's attestation report as part of the annual report.
2.4 Corporate Governance:
Corporate governance requirements are intended to encourage
the bank to be well managed and is an indirect way of achieving other
objectives. As many banks are relatively large, with many branches and
subsidiary businesses, it is important for management to maintain a close watch
on all operations.
Investors and clients will often hold higher management
accountable for missteps, as these individuals are expected to be aware of all
activities of the institution. Some of these requirements may include:
· To be a body corporate (i.e. not an
individual, a partnership, trust or other unincorporated entity)
· To be incorporated locally, and/or to
be incorporated under as a particular type of body corporate, rather than being
incorporated in a foreign jurisdiction
· To have a minimum number of directors
· To have an organizational structure
that includes various offices and officers, e.g. corporate secretary,
treasurer/CFO, auditor, Asset Liability Management Committee, Privacy Officer,
Compliance Officer etc. Also the officers for those offices may need to be
approved persons, or from an approved class of persons
· To have a constitution or articles of
association that is approved, or contains or does not contain particular
clauses, e.g. clauses that enable directors to act other than in the best
interests of the company (e.g. in the interests of a parent company) may not be
allowed.
· To have a limit on the tenure of Chief
Executives
· To have and disclose adequate information
on the shareholding of directors
2.5 Credit Rating:
Banks may be required to obtain and
maintain a current credit rating from an approved credit rating agency, and to
disclose it to investors and prospective investors. Also, banks may be required
to maintain a minimum credit rating. These ratings are designed to provide
color for prospective clients or investors regarding the relative risk that one
assumes when engaging in business with the bank. The ratings reflect the
tendencies of the bank to take on high risk endeavors, in addition to the
likelihood of succeeding in such deals or initiatives.
2.6 Large Exposures Restrictions
Finally, banks are restricted from
large exposures to individual counterparties or groups of connected counterparties.
Such limitation may be expressed as a proportion of the bank's assets or
equity, and different limits may apply based on the security held and/or the
credit rating of the counterparty. Restricting disproportionate exposure to
high-risk investment prevents financial institutions from placing equity
holders' (as well as the firm's) capital at an unnecessary risk.
CONCLUSION
This paper is an attempt at
investigating the critical aspects of banking practices that makes it necessary
for the governement to control baking oprations. For teh purpose of the study,
we examined previous literature on the subject matter and concluded that the
following areas of banking activities should by necessity be subjected to
government control: Reserves and Liquidity, Requirements, Capital Requirements,
Financial Reporting and Disclosures, Corporate Governance, Credit Rating and
Large Exposures Restrictions. We however note that the issues listed here are
not exhaustive of all critical aspects banking practices subject to control but
they are very close to the top of the list.
REFERENCES
Anyanwaokoro,
M. (2008): Methods and Processes of Bank Management, Revised and Enlarged
Edition, Johnkens and Wiley, Enugu, Nigeria
Ebhodaghe, John U. (2015): Bank
Regulation In Nigeria, Retrieved on 29/04/2016 from http://www.nigerianobservernews.com/
Moore, Winston. (2009): How do
financial crisis affect commercial bank Liquidity? Evidence from Latin America
and the Caribbean, MPRA paper 21473, university, library of Munich.
Olashore, O. (1988): Finance, Banking and Economic
Policies, Heinemann Educational Books, Lagos
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