identify and discuss extensively the various types of coverage employed by Ndic in the event of bank failure
The Nigeria Deposit Insurance Corporation (NDIC) is an independent agency established by the Nigerian government to protect depositors and promote stability in the banking system. In the event of a bank failure, NDIC employs various types of coverage to safeguard depositors' funds and ensure the stability of the financial system. These coverage types include:
1. Deposit Insurance Coverage: NDIC provides deposit insurance coverage to depositors in Nigerian banks. Currently, the maximum coverage limit is set at N500,000 per depositor, per bank. This means that if a bank fails, depositors are guaranteed to receive up to N500,000 of their deposited funds back.
2. Differential Premium Assessment System: NDIC uses a Differential Premium Assessment System (DPAS) to determine the amount of premium to be paid by each insured bank based on their risk profile. This system ensures that banks with higher risk factors pay higher premium rates, encouraging sound risk management practices and discouraging excessive risk-taking.
3. Bridge Bank Resolution Strategy: In the event of a bank failure, NDIC implements a bridge bank resolution strategy to protect depositors and maintain continuity of banking services. Under this strategy, NDIC establishes a bridge bank to assume the operations, assets, and liabilities of the failed bank temporarily. This allows depositors to access their funds through the bridge bank while efforts are made to recapitalize or sell the failed bank.
4. Purchase and Assumption Method: NDIC may also employ the "purchase and assumption" method to resolve a failed bank. Under this method, a healthy and solvent bank acquires the assets and assumes the liabilities of the failed bank, including deposit liabilities. This ensures the continued operation of banking services and protects depositors' funds.
5. Liquidation: In extreme cases, NDIC may resort to liquidation when the failed bank cannot be successfully resolved or recapitalized. In this case, the assets of the failed bank are sold off, and the proceeds are used to pay off the bank's liabilities, including insured deposits. However, as liquidation typically results in significantly lower recoveries, depositors are generally better protected through the bridge bank or purchase and assumption methods.
It is worth noting that while NDIC provides deposit insurance coverage, it does not cover all types of funds. Some examples of funds that may not be covered include foreign currency deposits, institutional deposits, and deposits held by financial institutions or government agencies. Additionally, in situations where a depositor holds more than N500,000 with a single bank, the depositor is only guaranteed up to the maximum insured limit, and any excess amount may be subject to loss.
In conclusion, NDIC employs various types of coverage to address bank failures and protect depositors' funds. These include deposit insurance coverage, the differential premium assessment system, bridge bank resolution strategy, purchase and assumption method, and liquidation. The goal of these coverage types is to ensure financial stability, maintain depositors' confidence, and minimize disruptions in the banking system.