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The Distress of Skye Bank - Unintended Consequences

Regulators	3933 VIEWS
Regulators
3933 VIEWS

Wednesday, September 26, 2018 06.29AM / FDC Research

Background

The CBN revoked the operating license of Skye Bank two years after its regulatory intervention and subsequent injection of funds. Consequently, a bridge bank, Polaris, in collaboration with Asset Management Corporation of Nigerian (AMCON), will turnaround the operations of the distressed bank. The optimization of internal business process will position the bank for a competitive takeover by interested buyers.

Underlying problems remain apparent

The struggling systemically important bank (SIB) had been in dire need of a recapitalization since its failure to pass a liquidity stress test in 2016. Since then, the bank had relied on the CBN for liquidity support and intervention.

The new arrangement with Polaris will help recapitalize the bank; injecting N786bn into the defunct bank to clean up its negative equity position. The regulatory authorities have chosen to maintain the current management team and promised a seamless transition to depositors.

Equity investors remain the biggest losers

In a stock market driven largely by technical analysis and speculations, and less of fundamental assessment, Skye bank’s stock gains soared to a high of 210% in 2018 (year-to-date). The decision to wind down the bank resulted in a write-down of Skye Bank’s market capitalization from N10.7bn to zero value. This will further dampen the confidence factor, which is yet to recover from the MTN saga and political fracas in the run-up to elections.

However, the decision of investors to invest in a bank that failed to publicly publish its financial performance since 2016 further accentuates the risk of fallout.

Implications on financial system stability

The decision by the CBN to extend support to Skye Bank stemmed from the need to prevent a financial system failure.

History has shown that what precedes a financial crisis is either a liquidity crunch or a capital deficiency. Skye Bank struggled with both criteria. This proves that there is no bank that is too big to fail.

The collapse of Skye Bank is expected to be a wakeup call for the regulators on the need to enforce a robust risk regulatory framework. This framework should extend beyond periodic regulatory examinations. These red flags will help curb the reputational and financial hemorrhage of a corporate meltdown.

Way Forward

The corporate failure of Skye Bank further emphasizes the need for robust corporate governance codes. The efforts by capital market players to amplify board corporate governance codes need to be taken up by the regulators as well. This will complement efforts by banks to improve their company rating, as well as their attractiveness to investors.