People don’t store money under the mattress anymore. Aside from the danger of loss due to fire or theft, money thus stored is stagnant. It does not increase in amount and will most likely decrease in value because of inflation or devaluation of currency.
To increase one’s savings, money must be put to use. The means most widely accepted and used—both for safekeeping and for profit—is the bank.
But how safe are they? The entire world banking system is very much interrelated. Necessarily; banks do a lot of business with one another, so there is tremendous interdependence. As a result, no bank or nation really stands alone.
So whenever a bank fails, there is concern that it may pull other banks down with it or reduce the confidence so essential to the banking industry. The possibility then exists that depositors elsewhere will rush to withdraw their funds and thereby cause the downfall of other banks in an uncontrolled domino effect.
Is there a chance that a bank collapse somewhere could pull down the international banking system? The Central Bank of Nigeria and other regulators are sure to take strong steps to prevent any major failure that appeared imminent I think it is most unlikely that it will happen. So far, even though there have been some serious problems and failures around the globe in recent years, the governments have stepped in to bail out their troubled financial institutions as occasioned by the intervention of the nation’s economic team.
The finance minister, CBN and the bankers are more than ever haunted by the specter of the second republic, and they will do everything they can to avoid a repetition of the financial catastrophe that happened five years ago—with the more or less conscious hope of avoiding its seemingly inevitable result. Still, there is reason for concern.
Banks are inherently risky business. They handle large amounts of money that is mostly not their own. Additionally, they create money and make loans far in excess of their net worth. While they may take adequate precautions, the banks know that some loans will turn bad. Therefore a certain amount is set aside as loan reserves to cover bad debts. But if an unusual number of loans turn sour, those reserves will not be sufficient to cover the large loan losses, or a run on the bank.
The more equity that’s at risk because of bad loans, the weaker the bank gets financially. Bankruptcy (or failure) occurs when all the bank equity is used up. More and more banks today are finding themselves in just that position—too many of their loans are turning sour, and there is insufficient capital to back them up. The reasons given are legion: the oil crisis, trade restrictions and deficits, downturns in the economy, unstable interest rates, capital flight, inflation, disinflation, recessions, overly aggressive lending policies, corporate bankruptcies, fierce competition, deregulation—even ignorance and stupidity.
Always looming ahead is the possibility that some deeply indebted nations, tiring of the hardships of austerity programs, may just decide not to pay at all. The banks cannot force sovereign states to pay. For banks, the meaning of the global debt crisis is simple; they earn most of their profits by making loans, and if countries cannot repay their huge loans, banks’ profits, capital bases, and stock prices could fall precipitously. . . . Significant the nation’s defaults could stretch the financial system to the breaking point, possibly resulting in the collapse of major banks.
A default by just four nations—Ghana, Uk, The Netherlands, and France—could bring about the collapse of the nine largest Nigeria banks. That actual defaults have not taken place is remarkable. One could, of course, attribute it to semantics. Just as wars are no longer ‘declared,’ no one is now declared ‘legally’ in default.”
Can one tell if a bank is strong and solvent? “For most depositors it’s difficult or impossible to find out what shape a bank” is in. Recent experience has shown that it is extremely difficult for outsiders to judge the soundness of a bank. Practically every large bank that collapsed in recent years, or nearly collapsed, had been highly touted by bank-stock analysts. . . . Even bank regulators and auditors were unable to detect serious troubles until it was far too late.
Usually the most a customer does is examine the bank cosmetically: the types of services offered the friendliness and speed with which he is served. In fact, where banks advertise, it is usually those things that they emphasize—the friendly banker, the quick loan, special accounts or services, convenience. Sometimes gifts are offered to lure in new depositors. But little is said about the financial standing of the bank. Of course, a bank’s services are important. Also to be noted is the interest given and how it is compounded, as yields will vary. Of utmost importance to the depositor is the safety of his money. Here, the Nigeria deposit insurance remains the key. “Because of deposit insurance, unless there are an utter collapse of the banking system these are the problems of bankers and bank stockholders, not depositors. It is extremely unlikely that bank failures today could bring thirties-style losses of life’s savings to individuals.
So it is good to check if accounts are insured and by whom. Government insurance, of course, is best. An example of this is the Nigeria Deposit Insurance Corporation. Some who were told that their accounts were insured later found that it was by a private agency with insufficient funds to repay all depositors when the bank failed. Check also the amount insured. If your account exceeds that limit, consider opening accounts in other banks so that all your money will be covered.
Individual bank failures are expected to continue and the number may even rise. Yet, what is of utmost importance to the banking system is that confidence in it be maintained. A crisis would occur only if depositors interpreted these financial lurches as a reason to withdraw their money from the affected banks. Therefore, all-out efforts are being made to strengthen the system and keep that confidence strong.
Plans are also in motion to reduce the debt of the developing countries to manageable levels and aid them to meet their obligations. In the final analysis, the enormous financial deficit will be absorbed by the taxpayers worldwide.
How safe, then, are the banks? One bank official put it this way: “The banks are as safe as the governments that back them up.” While that may seem reassuring now, it gives thinking persons reason for pause. Why? And it points to events of this 21st century as marking the transformation of the present system of things. The banking system is completely safe. The Federal Government has in place the mechanisms to take care of any bank regulators and auditors even when they were unable to detect serious troubles until it was far too late.