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Economic crisis: Augusto urges pursuit of legitimate banking

By Yinka Kolawole
Against the    backdrop of the current economic crisis ravaging the world, banks have been urged to stick to straight-forward legitimate banking noting that every effort must be made to maintain the confidence of the investing public in the system.

Former Special Adviser to the President on Budget Matters and Director-General, Budget Office, Mr. Bode Augusto, gave the advice at the 2009 Lagos Bankers’ Nite, Thursday, in Lagos, while delivering a paper on the theme: “Global Financial Meltdown: The Lessons Not Learnt”, organised by the Chartered Institute of bankers of Nigeria (CIBN), Lagos Branch.

According to him, banking business is a confidence game and as such banks should bear in mind that any acts by them that impair the confidence of depositors pose risks, not only to themselves but the banking system as a whole. He noted that the meltdown which started off as a financial crisis has since grown into a full blown economic crisis.

He quoted a letter written by Hugh McCulloch in December 1863, as newly appointed US Comptroller of the Currency, addressed to US banking institutions: “Pursue straight-forward, upright, legitimate business. ‘Splendid financing’ is not legitimate banking and ‘splendid financiers’ in banking are either humbugs or rascals”.

Speaking further on lessons we ought to have learnt but have not learned, Augusto asserted that the quality of a loan cannot be better than the quality of the underlying borrower. “This is a basic principle of lending but bankers are still fond of repackaging loans and trying to make people believe that the risk of default after repackaging is lower,” he stated.

The former Presidential aide also canvassed that rating agencies should be independent of the entities they rate, emphasizing that independence and impartiality of mind is a very important standard that rating agencies must adhere to.

He also pointed out that in the long run, high oil prices do not benefit anyone. “We have seen oil prices move from $30 per barrel in 2003 to $147 per barrel in 2008. As oil prices climbed to this peak, industries began to groan under higher costs and the purchasing power of households went down triggering what has been labeled the worst recession since 1930s. Highly volatile revenues make public expenditure management more difficult for oil producers.

“During the period of strong oil prices, the oil producers built up their cost structures. Before the boom, most could balance their budgets with $25 per barrel oil, now they require $50per barrel. Nigeria needs $100 per barrel oil to balance her budget. Most of these oil producers are rapidly depleting savings in order to finance their budgets,” he noted.

Speaking further, Augusto cautioned against government ownership of financial institutions, noting that it is not right for government to own and regulate banks. “It is not difficult to see what will suffer as government appointed regulators try to please their political masters,” he added.

Earlier in his welcome address, Chairman, CIBN, Lagos Branch, Mr. Bayo Olugbemi, noted that the forum is created for bankers and stakeholders in the banking and finance industry, to deliberate on contemporary issues particularly affecting the sub-sector of the nation’s economy.

According to him, this year’s theme is “unique in every sense because of the need to address the investment climate of our great nation vis-a-vis the global economic environment.

“The global financial meltdown, in terms of its overriding consequences, is still unfolding and there is no gainsaying that world leaders and financial players have not really learnt all the lessons therein.”


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