ABSTRACT
The creation of asset management companies (AMCs), bridge banks and securitisation are valuable tools for resolving non-performing loans (NPLs) when banks are in financial crisis. They take out toxic assets and inject fresh funds into the banking system. Apart from protecting the banks and their depositors in financial distress, these tools also aim to limit the utilisation of public funding in bank resolution. Bank resolution tools are essential for addressing panic and liquidity in the financial system. There is a broad consensus that high NPLs ultimately harm bank lending to the economy. Where banks fail in their lending activities, it may not be the best strategy to liquidate them because banks play a more significant role in the economy than in offering credit. For instance, banks are the fulcrum of the payment system and monetary policy, the disruption of which could lead to systemic collapse if NPLs result in their liquidation.
The solution of preserving banks and resolving their financial distress through NPL resolution tools may be affected by country-specific policy characteristics, which may constrain an NPL resolution tool’s effectiveness. NPL resolution tools interact with other policies during a financial crisis. These variables include the general creditor rights and the insolvency regime, which support the financial system’s foundation.
This paper examines the implementation of the AMC resolution model in Nigeria by creating the Asset Management Corporation of Nigeria (AMCON), interrogating its relationship with the broader insolvency and creditors’ rights framework (ICR) and arguing that there is a correlation between the level of NPLs and the ICR regime. AMCON resolution tools alone do not provide an adequate and robust crisis management framework for resolving bank financial distress. An efficient ICR rights regime balances the creditors’ and debtors’ rights through reorganisation or liquidation. Also, government policy measures on credit reporting and secured creditors’ rights in movable and immovable assets encourage responsible borrowing and lending and reduce bad credit generation that transforms into NPLs requiring resolution through an AMC. This way, the resolution framework is focused on managing NPLs arising from financial panic and emergencies rather than bad prudential decisions. The paper argues that the improvements in law reform in Nigeria’s insolvency and creditor rights regime could explain NPL’s fall from 2009 to 2020. Each country’s policy characteristics affect NPL management’s policy space. Active engagements and collaboration between the private and public sectors are necessary to constantly expand the policy space for managing NPLs, recognising the link between the broader ICR framework and bank resolution tools.
