Group-Decisions, Economic Policy and the Resolution of Non-Performing Loans

Abstract

Non-performing Loans (NPLs) have international ramifications because many banks operate in several countries and NPL-resolution related laws enacted in their home countries affect their foreign operations. While the management of Non-performing Loans (NPLs) remains a major problem around the world and requires long term preventive measures, Asset Management Corporations (AMCs) which are an afterthought (sometimes politically-motivated and usually introduced after non-performing loan - NPL - rates have exceeded permissible levels), have been created in various countries to help resolve NPLs and associated banking crisis. There have been mixed reviews of the effectiveness of AMCs and other methods of resolution of bank crisis in general; and AMCs can amplify financial instability and systemic risk problems in national banking systems. Within the context of the operations of Asset Management Corporation of Nigeria (AMCON), this article explains the following: i) accounting disclosure, “Bank Opacity” and behavioral problems may contribute to increases in earnings management and systemic risk; ii) there have may been a symbiotic relationship between the liquidity of Nigerian Banks’ shares/GDRs and institutionalized earnings management and corporate governance deficiencies on one hand, and AMCONs’ activities ii) AMCON has failed in its purpose and its business model has increased systemic risk and financial instability; iv) the AMCON business model caused other social and economic problems – such as Inefficient Cross-Subsidization (among banks and industries), Valuation-losses, Distortion of Borrowers’ Willingness-To-Resolve and Moral Hazard, and increased earnings management in various industries in Nigeria; v) the interaction of industry-level, firm-level and institutional-level corporate governance factors can affect banks’ reactions to AMCs’ activities. The article also proposes testable hypothesis, new theories of group-decisions and antitrust, and feasible solutions to problems caused by NPLs, AMCs in general (and AMCON in particular) and the Corporate Governance and antitrust deficiencies discussed herein.