By Babajide Komolafe

The extent of official support to the three bridge banks created to assume assets of Afribank, Bank PHB and Spring Bank is key to restoring confidence in the banking sector, said Razia Khan of Standard Chartered.

“The extent of official support now extended to the rescued entities  (now ‘newly incorporated bridge banks’)  will be key to restoring confidence in the sector, and seeing a smooth transition”, she said in an email response to the revocation of the licenses of the three banks and subsequent assumption by the Nigeria Deposit Insurance Corporation (NDIC).

Khan who is the Regional Head of Research, Africa for , Standard Chartered Bank said said, “Earlier, the authorities had hinted that banks failing to recapitalise by the stated  end- Sept 2011 deadline would be taken over by the AMCON – effectively nationalised.  We will wait to see if this is the case.”

“Clearly, a pledge of official support – repetition of the promise two years ago that depositors’ interests would be fully safeguarded – will now be needed to ensure calm, and to prevent any nervousness about the state of Nigeria’s banking sector from feeding  through into greater demand for foreign exchange.

In recent communiqués, the CBN had emphasised that over 50 per cent of the ‘systemically significant’ banks in which they had intervened in 2009, were in the process of being recapitalised.  (Interbank guarantees for at least four institutions have been extended to the end of 2011).

With hindsight, this may have been aimed at shoring up confidence in the market, allowing the authorities to adopt a tougher stance against the (still – undercapitalised, but smaller) institutions still resisting full resolution.  Recall that no formal forbearance had been granted to these institutions.

By taking action before the end-September deadline on the lifting of official interbank guarantees, the authorities may well be hoping to effect a faster financial sector resolution, thus avoiding the risk of sharply higher interbank rates, or possibly even runs against the rescued institutions, that might have resulted from deteriorating confidence as the end-Sept 2011 deadline drew near.

“The official guarantee on interbank deposits was clearly the lifeline that had been extended to all rescued banks, and was instrumental in the authorities’ ability to restore calm rapidly following their August 2009 banking sector intervention.

They were not going to risk the progress made then, on banks resisting faster resolution of the banking sector crisis now.   So much as in 2009, once again the risks have been identified, and effectively ring-fenced.

“By announcing these measures late on Friday afternoon, after the close of markets, the authorities are also allowing time for the markets to digest the implications, and perhaps clarify any outstanding issues, before Monday’s open.

While some level of nervousness might persist, pending the availability of full information, we expect any market volatility to be short-lived. Longer-term, faster resolution of any outstanding issues related to Nigeria’s banking sector crisis is a positive for investor sentiment.

The absence of any spike higher in interbank rates with the approach of end-September deadline (which has now lost much of its relevance) should – alongside the recent lifting of the one year minimum holding period restriction on offshore investment in FGN bonds – contribute to an improved investment outlook, boosting confidence and ultimately helping to stabilise the naira.