Impact of Regulation and Supervision on the Activities of Banks

BACKGROUND OF THE STUDY.

A solid and stable financial sector is essential to make a well-functioning national economy and to ensure a balanced liquidity within the economy. Banking system as a sensitive sector in the economy over the world has a very important role to play in these policies. Banks liquidity which can be expressed in terms of its assets (i.e. the extent to which the assets are converted to cash, thereby enabling it to pay its debt when they fall due and also to move into new investment opportunities) must be regulated in order to control the quantity of money in circulation. Appropriate liquidity management is essential to foster economic growth. Though, to achieve economic stability properly, the use of fiscal and monetary policies is required. Despite establishing regulatory agencies and monetary policy committees, Nigerian banks have actually been deterred in creating adequate liquidity and additional credit for the sustenance of the entire economy.

The Central Bank of Nigeria (CBN) over the years, have instituted various monetary policies to regulate and develop the financial system in order to achieve major macroeconomic objectives which often conflict and result to distortion in the economy. Although, some monetary policy like cash reserve, and capital requirements have been used to buffer the liquidity creation process of commercial banks through deposit base and credit facilities to the public.
In the past decade, significant changes in the design and conduct of monetary policy have occurred around the world. Many developing countries, including Nigeria have adopted various policy measures to achieve targeted objectives.

It also aims at maintaining external balance of reserve and reducing excess liquidity of banks to the bearest minimum. As a result of these, monetary policy is therefore seen as a matter of great importance.

The smoothing of the business cycle, preventing financial crisis and stabilizing long term interest rates and the real exchange rate have been identified recently as other supplementary objectives of monetary policy because of the weaving global financial crisis which engulfed major developed and emerging economies in the world.

The central bank is responsible for the conduct of monetary policy to pursue those objectives. All Central banks globally, including Central Bank of Nigeria (CBN), often employ certain monetary policy instruments like bank rate, open market operation changing reserve requirements and other selective credit control instruments. Central bank also determines certain targets on monetary variables. Although, some objectives are consistent with each other, others are not, for example, the objectives of price stability often conflicts with the objectives of interest rate stability and high short run employment.

When Central bank’s actions and regulation restrict the activities and operations of profit making financial institutions such as commercial banks, finance companies and non-financial institutions such as co-operatives, thrift institutions and pension funds, they immediately search on alternative ways of making their profit. The policy constraints can also affect the level of development in the economy. The instruments of monetary policy do not affect economic activities directly; rather they work through their effects on financial markets. The policy instruments have their initial impact on the demand for and supply of reserves held by depository institutions and consequently on availability of credit.

By manipulating these instruments, central banks affect the rate of growth of the money supply, the level of interest rate, security prices, credit availability and liquidity creation from the aid of commercial bank. These factors, in turn can cause monetary imbalances or shocks on the economy by influencing the level of investment, consumption, imports, exports, government spending, total output, income and price level in the economy.