The African Financial Review July-August 2014 | Page 12

government emerging measures to resuscitate distress (von Hagen
and Ho, 2007). In line with the direct view, Demirgüc-Kunt and
Detragiache (1998) noted that banking crises evolve when at least
one of the following occur; the ratio of non-performing assets to
total assets in the banking system exceeded 10%, the cost of the
rescue operation was at least 2% of GDP, banking sector problems
resulted in a large-scale nationalization of banks or extensive bank
runs took place or emergency measures such as deposit freezes,
prolonged bank holidays, or generalized deposit guarantees were
enacted by the government in response to crisis. The event-based
view has been applied in various research studies.
However, the application of this view may be misguided, because
it is mainly based on information about government actions
undertaken in response to banking crises and bank distress
which may lingers on for quite some time before government
action is taken (Boyd et al., 2009). Also when the crises dates are
compared in various studies differences in the timing of crises
will be observed and different studies identify the onset of same
crisis by a difference of more than two years.

The second view on banking crises (indirect indicator)
focuses on an index of money market pressure that is; a weighted
average of the ratio of reserves to bank deposits and of changes
in short-term interest rates. The standard deviations of the
two variables are the weights (von-Hagen and Ho, 2007). Few
studies (Kibritciouglu, 2002; Singh, 2012) have employed this
view in determining banking crises. The indirect indicator has
advantages over the schemes based on expert judgments (direct
indicators) but there is the possibility that the indirect-indicator
schemes pick up business-cycle effects instead of signs of banking
cr ises (Kaehler, 2010). Many of the studies that are conducted
in developed economies have shown that inflation tends to fall
due to crises. This is anchored on the reasons that many of these
countries have not fully recovered from the crisis, and therefore
need some level of inflation to propel the economy or that the
inflation expectations have been well-anchored to mediate
the possible consequences. However, in economies where the
monetary authorities may not have the required independence
and credibility to effectively anchor the expected inflation, banking
crises may thus exacerbate the inflation level. Under this condition,
there may be the need for monetary authorities to absorb excess
liquidity during banking and financial crisis.

Generally, studies have shown conflicting results on the
impact of banking crises on inflation in various economies (Galati
et al., 2011; Stock and Watson, 2010; Naghdi et al., 2012). The
study conducted by Boyd et al. (2000) considered the effect of
single and multiple periods of banking crises on inflation. They
show that banking crisis leads to significant fall in broad money,
but the impact does not translate to inflation in a single crises
period. However, when considering multiple crises periods,
banking crises have significant effect on inflation. The value of
inflation tends to fall largely due to the crises. They noted that
inflation rates are not significantly different in post-crisis periods
and in pre-crisis periods.

Kaminsky and Reinhart (1999) noted that problems in
the banking sector typically precede a currency crisis and the
currency crisis deepens the banking crisis which distorts the
stability of monetary policy. Also, banking crises will be more
severe when currency crises happen simultaneously. This will thus
lead to distortions in monetary policy. Martinz periz (2000 and
2002) empirically investigated the monetary impact of banking
crises in Chile, Colombia, Denmark, Japan, Kenya, Malaysia, and

12 | The African Financial Review

Uruguay during 1975 to 1998. The study concluded that prices are
relatively not stable over the years. This is as a result of the crises
experienced in these countries considered. The study noted that
banking crises are liable for price instability in most countries.

Reinhart and Rogoff (2008) noted that banking crises almost
invariably lead to sharp declines in tax revenues and significant
increases in government spending (a share of which is presumably
dissipative). It may also jeopardize the effective functioning
of payment systems, by undermining confidence in domestic
financial institutions; they may cause a decline in domestic
savings and/or a large-scale capital outflow (Demirgüç Kunt et

There is concern over the capital inflow into
African economies and limited availability of
trade financing arising from the global credit
crunch. The more African countries appreciate
the magnitude and implications of the present
economic realities, the more they need to look
for the necessary solutions.
al., 1998). Mohanty and Klau (2001) showed that inflation is
affected by several non-monetary factors, most notably frequent
supply shocks. The supply side factors seem to play more than a
passing role in the inflation process. Exchange rate and import
prices turned out to be a significant and important determinant
of inflation.

Naghdi et al. (2012) empirically investigated the impact of
global financial crises on inflation in OPEC member countries.
He found out that financial crisis affect economic variables such as
economic growth, oil price and stock price index (that is financial
markets), which in turn changes inflation. In other words crises
caused an increase in oil price which in turn had a positive
and significant influence on the inflation in OPEC countries.
Alagidede et al. (2010) studied inflation persistence in WAMZ.
They came to conclusion that; there is variability in inflation rate
among WAMZ countries. Inflation rates for Ghana, GuineaBissau and Sierra Leone appeared to have been more volatile
over the sample period and the mean inflation ranged from 8.5
to 30.9% during the period of study. Damian (2012) reported that
financial crises have both positive and negative effects on inflation.
The positive effect is as a result of it decreasing commodity prices
and expands economic activity while the negative effects are as a
result of the fact that it depreciates a country’s currency.

Banking supervision in WAMZ

There is a possibility that banking crises in Nigeria is likely to
spill-over to other countries in WAMZ given the fact that most
Nigerian banks are in other WAMZ countries. Also, Nigeria
banks accounts for a high fraction of banks total assets in
WAMZ. Economic literature has shown that a good regulation
and supervision minimizes the negative impact of moral hazard
and price shocks in the banking system, thereby leading to a
reduction in bank failures and banking system distress (Vitas,
1990). Banking supervision is the process of monitoring banks
to ensure that they are carrying out their activities in a safe and
sound manner and in accordance with prescribed laws, rules and
regulations. Also, effective supervision of banks leads to healthy
banking industry (Bench, 1993).

In The Gambia, as part of the financial sector reform, the