The transmission failure of banking capital

The transmission failure of banking capital.

Splitbox Journal • Operator's Notebook

Scale is not capability.

Recapitalizing a banking system creates larger balance sheets. It does not change how an institution prices uncertainty. The National Institute of Credit Administration is seeking a N2 trillion sovereign guarantee to bridge the gap between banks and the economy. This is a signal of structural failure.

Nigeria's private sector credit to GDP ratio is 28 percent. This is not a liquidity problem. When a bank chooses risk-free government paper over a manufacturer, it is not for lack of funds. It is a lack of confidence in recovery.

A state-backed guarantee is an admission that institutions cannot price local risk. If the state capitalizes this N2 trillion, it is not a stimulus. It is a massive, off-balance-sheet expansion of sovereign debt.

Capital adequacy is a regulatory floor. It is never a lending incentive. Investors must stop monitoring Tier-1 ratios. The only metric that matters now is the guarantee-to-loan ratio. That is the true measure of credit expansion.

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