Wednesday, June 6, 2012

Still on amending the Central Bank of Nigeria Act

The decision to amend the CBN Act by Nigeria’s house of assembly has been received with a lot of criticisms from the media. In my reading however, I have seen little or no attempt by the media to actually put before the public how Central Banks in other countries operate.  So in the next few paragraphs, I write on how the Central Banks of the United States of America (USA), Canada and Germany operate in relation to their financial systems.
Sanusi Lamido Sanusi, Governor, Central Bank of Nigeria

The equivalent of Nigeria’s Central Bank is the Federal Reserve Bank in the USA. Like Nigeria’s Central Bank, the Federal Reserve Bank is in charge of monetary policy in the US but unlike Nigeria’s Central Bank, it is not solely in charge of bank regulation in the US.   It is usually referred to as the Federal Reserve System because there are 12 other regional reserve banks in the US in charge of regulating banks within their regions.

The Federal Reserve Bank, commonly referred to as the “Fed” is responsible for regulating the US monetary system and monitoring the operations of Bank holding companies. The Fed is controlled by a seven man board chaired by the Ben Bernanke, who can be referred as the Governor of the Fed. The Board also has a Vice Chairman. The Seven members of the board are appointed by the President and confirmed by the US Congress.

The Chairman of the board is also required to brief congress twice yearly on its conduct of monetary policy and economic developments and prospects for the future.

The Chairman of the board is also required to appear before the Banking and Financial services committee of Congress on scheduled dates to brief it on key issues about the economy as well as submit a detailed report on the economy to congress before its appearance.

The Congress also sets the salaries of the board members of the Federal Reserve System. For 2012, the Chairman's annual salary is $199,700. The annual salary of the other Board members (including the Vice Chairman) is $179,700.

The Federal Open Market Committee (FOMC) is the monetary arm of the Fed. It is made of the seven members of the Fed Board and additional five members selected from the Presidents of the 12 regional Feds who rotate their positions on a yearly basis except the Present of the New York Fed who is a permanent member of the FOMC.

The US Department of Treasury, the same as Nigeria’s Ministry of Finance, also has regulatory powers over the US banking system through the operations of two agencies it oversees, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision, which regulate banks and savings and loans.  The Fed can also only offer financial support to failing banks with the collaboration of the Department of Treasury.

The OCC is responsible for licensing all U.S. banks and, more broadly, for ensuring the stability of the banking system while the Office of Thrift Supervision (OTS) is charged with supervising federally-licensed savings and loan associations, also known as "thrifts. The Federal Deposit Insurance Corporation (FDIC), with similar functions as Nigeria’s Deposit Insurance Corporation (NDIC) also has regulatory powers over the financial system while the Securities and Exchange Commission (SEC) regulates securities trading.

In Canada, the Bank of Canada does not have supervisory powers over banks. Instead, it acts as a lender of last resort, supplier of emergency liquidity to banks in distress, fiscal agent to the Canadian government and issuer of currency. The Bank of Canada is thus mainly in charge of monetary policy and financial stability. The actual regulation of banks is the function of the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC).

The highest financial regulatory organ in Canada is the Financial Institutions Supervisory Committee (FISC) comprising the Superintendent of the OSFI, Governor of the Bank of Canada (equivalent of Nigeria’s Central Bank Governor), Chair of the Canadian Deposit Insurance Corporation, Commission of the FCAC and the Deputy Minister of Finance. The FISC is chaired by the Superintendent of the OSFI, meets quarterly and reports directly to the Minister of Finance. It is also interesting that the Minister of Finance has the power to set the monetary policy of Bank of Canada with the approval of the Canadian Parliament.

The German Bundesbank
The Executive Board governs and manages the Bundesbank. It comprises the President (equivalent of the Central Bank Governor), the Deputy President and at four other members. The members of the Executive Board are appointed by the President of the Federal Republic of Germany. The President, the Vice-President and one other member are nominated by the Federal Government; the other three members are nominated by the Bundesrat (the upper house of Parliament representing the Federal States) in agreement with the Federal Government.

Banking supervisory functions of the German Central Bank is jointly shared between it and the German Financial Supervisory Authority (Bafin) which is under the supervision of the Ministry of Finance.  Bafin is an integrated regulatory body with supervisory powers over insurance and securities trading. The Bundesbank audits the banks but has to take its findings to the Bafin which takes the final decision on the outcome of the audits.

A look at most regulatory models around the world shows that it is a close collaboration between the Ministry of Finance, the Central Bank, other regulatory bodies with the parliament offering  oversight and accountability. Most Central Bank’s independence is more  restricted to carrying out monetary policy decisions but not necessarily in non-monetary functions like bank supervision and regulation.  It is important that this distinction is made in the current debate about the autonomy enjoyed by the Central Bank of Nigeria.

But as I noted in an earlier post, the debate should go beyond amending the CBN Act to how the financial sector is regulated in Nigeria.

Watch a sceptics view of Central Banking
Alan Greenspan speaks on monetary and fiscal policy

Sunday, June 3, 2012

Ben Bernanke’s Speech on Central Bank's Independence

As Nigerians continue the debate on the amendment of the Central Bank of Nigeria Act,  Ben Bernanke Chairman of the Federal Reserve System delivered a speech in 2010 defining the scope of  Central Bank independence.
Ben Bernanke, Chairman of the Board of the Federal Reserve System

See the link to the speech here

For those who may not have time to read the full speech, here is a brief on what he said about Central Bank’s independence.

Central Banks were largely able to deal with the financial crisis because they were able to make monetary policy decisions based on what is good for the economy in the longer run, independent of short-term political considerations.

Central bankers must be fully accountable to the public for their decisions, but both theory and experience strongly support the proposition that insulating monetary policy from short-term political pressures helps foster desirable macroeconomic outcomes and financial stability.

Transparency and accountability must go along with Central Bank independence

There exists a broad consensus among policymakers, academics, and other informed observers around the world that the goals of monetary policy should be established by the political authorities, but that the conduct of monetary policy in pursuit of those goals should be free from political control.

Political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.

He emphasizes however that he is “by no means advocating unconditional independence for central banks. First, for its policy independence to be democratically legitimate, the central bank must be accountable to the public for its actions”

Then he states that “the independence afforded central banks for the making of monetary policy should not be presumed to extend without qualification to its nonmonetary functions”

He lists some of the nonmonetary functions to include, oversight functions over the banking system.

In the conduct of its regulatory and supervisory activities, the central bank should enjoy a degree of independence that is not greater and not less than that of other agencies engaged in the same activities; there should be no "spillover" from monetary policy independence to independence in other spheres of activity.

Bernanke lists the range of activities that covers Central Bank’s monetary policy decisions that requires independence to include “Conventional monetary policy, which involves setting targets for short-term interest rates or the growth rates of monetary aggregates,  the central bank's discount-window and lender-of-last-resort activities”  

These activities involve the provision of short-term, fully collateralized loans to the financial system as a means of meeting temporary liquidity needs, reducing market dysfunctions, or calming financial panics.

Democratic principles demand that, as an agent of the government, a central bank must be accountable in the pursuit of its mandated goals, responsive to the public and its elected representatives, and transparent in its policies.

He list the ways in which the Federal Reserve has maintained transparency and accountability to the US Congress and public to include;

Frequent speeches and testimonies before congress on the economic situation and on the prospects for policy, submission of extensive reports to Congress twice each year on the economy and monetary policy

Also the Monetary policy committee of the Federal Reserve publishes a statement after each of its meetings that explains the Committee's policy decision and reports the vote on that decision. The FOMC also publishes the minutes of each meeting just three weeks after the meeting occurs and provides, with a lag, full meeting transcripts. 

In addition, the FOMC has begun providing the public a quarterly summary of Committee participants' forecasts of key economic variables and, more recently, their assessments of the longer-run values to which these variables would be expected to converge over time. 

Friday, June 1, 2012

I no longer wish to be called Goodluck Ebele Azikiwe Jonathan

His Excellency Sir, we have received your request for a change of name, that you no longer wish to be known and called Goodluck Ebele Azikiwe Jonathan, but now wish to be called Obama Otueke, in honour of the first black President of the United States of America and the first village in Africa where a child once walked shoeless but is now the President of the biggest black nation on Earth.

Goodluck Ebele Azikiwe Jonathan, President Federal Republic of Nigeria. 

Your Excellency, in line with your request on May 29, 2012 we immediately moved to make the requested change. We are writing this mail to intimate you of how we have progressed so far to ensure that all your past records align with your new name.

First, we have had to visit your primary school at Oloibiri, St Stephens and St Michael’s primary school which you left in 1969. We are sorry to tell you that the school could not trace your records. They claim that they do not have a very good record system and so it was almost impossible to trace your records and note your name change against it for the sake of future enquiries. The danger of not doing this is that when people make enquiries about you in future, you may not be recognised and this could be a tool in the hands of your political enemies who may say you never attended these schools.

We also visited your former Secondary School, Mate Dei High School, Imiringi. We had some luck here; they were able to trace your certificate and marked your new name against it. But you may need to visit this school, they would appreciate some generous donation from an illustrious alumni like you.

They, however, advised that you have to contact the West African Examination Council (Waec) to inform them of your name change. This is to ensure that your records with the examination body tallies with your new name.

 We visited the University of Port Harcourt where you had all your three degrees. They spent some time looking for your transcripts in the records office which was stacked full with files upon files. But they eventually traced all your transcripts and have noted your new name against it.

The difficult part of this assignment was in telling your parents about your change of name. We are afraid to say they did not take it kindly. Your Dad threatened to commit suicide if you give up the name that he has brought you up with, the family name that has brought you so much greatness.

This is the name, he insists, that has taken you from being shoeless to now having so many shoes. He refused to listen to reason and said that he will rather die than see you answer a new name.  Your Mother’s case was quite different. She was just silent as she shook her head repeatedly. All she said as we were leaving was that her enemies will not succeed.

We had to break the news to your dear Wife. She did not take kindly to it either. How can you wake up and suddenly dump a name that has brought you so much good luck, she asked. She even said that she is sure that the witches in the opposition party have confused your mind.

She raised several issues. What happens to her marriage certificate? What does she tell her friends? How is going to tell them that she is no longer Mrs Goodluck, that she is now Mrs Otueke?  Assuming she loses all the good luck that has come to her since she married Mr Goodluck, she wondered. God Forbid, she said. If there is any change of name, she will assume she is now a widow. She insists that her marriage certificate reads Mrs Goodluck and the contract says “till death do us part.” So any change of name means Goodluck is late and she is now a widow.  His Excellency, we are afraid to tell you that we did not make any progress with Her Excellency on this issue.

Finally, we had to let INEC and your party into your change of name initiative. INEC simply advised that the name on the ballot paper when you contested was Goodluck Ebele Azikiwe Jonathan and that is the name they recognise.  That if you have to change your name, then you may have to contest a new election based on your new name. Simply, you have to resign now and handover to the Vice President and contest the next election based on your new name. They insist that they have it on good record that a lot of Nigerians voted for you based on the Goodluck in your name. Without it, you would not have won the election, they insist. We advise that you may have to challenge their decision at the Supreme Court. 

The position of your party was not that much different from that of INEC. They also insist that what sold you to them was the Goodluck in your name, that your new name cannot win an election. They would therefore be reluctant to field you in the next election if you chose to go ahead with your new name.

Your Excellency, so this is how far we have gone with the request for change of name. We are yet to contact all Nigerian embassies abroad, all other country embassies, all other foreign head of states and all international bodies like the UN, African Union, ECOWAS and all others that have known you by your old name of your decision to change your name. They will also have to effect changes in their records to that effect.

Your Excellency, changing your name at the age of 55 is not an easy task to accomplish. Considering all you have achieved in such a short life. We have attached a detailed budget of the financial implication of this name change. However, we kindly advise that dealing with the human implication is beyond our capacity. So we advise that you talk with your wife, parents, children, friends, INEC and your party. Hopefully, you will be able to convince them about your intention.