Key Features:

No of Chapters: 5
No of Pages: 104
Methodology: Ordinary Least Square

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Introduction:

Banks as financial institution are associated with some degree of risk, that is to say that risk and banks are interwoven they cannot be separated. Banks have always engaged in risk taking through maturity transformation borrowing short and long term loans. Contrary to the general view that risk taking in banks, or in any business activity as solely led to corporate failure, fear of these potential losses may prevent them from engaging in certain activities which may turn out to be very profitable; Isenmila (2002). Banking is in existence because of risk taking and the industry is booming because they have managed their risk, they take risk such as deposit, given loans and advances as well as investing in bills and other security, bank continuously engaged in risk taking even though the embodied liabilities and assets very in their risk. Risk of bank can be classified into two broad categories; fraud risk and market risks.

Fraud is a deliberate deception, trickery or cheating for unlawful gain through theft, defalcations and embezzlement. Frauds result in the largest losses to depositors and other creditors including deposit insurance agencies. They are rampant pervasive and the biggest single cause of bank failures in the United States of America during the 1959/1971 was due to fraud and irregularities. Hill (1975) also found that 88% of the 67 failures during 1960 to 1994 was due to improper loan defalcations, embezzlement and manipulation.

Adewonmi (1986) observes that of all the various problems confronting Nigerian banking industry today, that fraud is easily the most intractable. Fraud therefore, is a “cankerworm that has eaten deep into the fabric of the present banking industry.
The second broad category of bank risk is market risks. This takes many forms. It comprises of all exposures t6hat subject the bank to the prospect of loss and hence the weakening of capital resources. As pointed out in another study, Nwankwo (1989) it is the pervasiveness of these risks and the failure of the market to effectively control them that explains why banks are more heavily regulated than any other commercial or industrial undertaking. Although, it is emphasized that the ultimate responsibility for evaluating risk and settling limits commensurate to a bank’s financial strength, reside with bank management. It is observed that without regulation, an undue percentage of financial institutions are likely to take excessive risk however, despite regulation and partly resulting from the cost of regulation risks have increased as bank innovated around the controls through services of off-balance sheet activities which earned them income without increasing the balance sheet totals. It is therefore necessary to examine what these risks are.

Off-balance sheet risks relates to those risks incurred by bank as the result of activities related to contingent assets and liabilities. However, the balance sheet does not tell the whole story. It does not contain all the risks in bank operations. This is because banks undertake a number of activities or operations off-balance sheet. These operations which have been on the increase since the nineteen seventies (1970s) are in broad categories.
One relates to guarantees and similar contingent liabilities. These include guarantees, acceptances, standby letters of credit warrantees, endorsement, some of which in practice are binding on a bank in all circumstances and some from which a bank could withdraw without penalty, an example of the former is the irrevocable letter of credit floating rates notes, note insurance and revolving under-writing facilities.

A third category covers foreign exchange interest rate and stock index related transactions. In most transaction the bank is exposed on the whole of the underlying principal of the transaction except when the settlement become due to those transactions involving the exchange of principal because of their substitutability for and similarity to on-balance sheet operations, supervisory opinion concluded that the risks involved in off- balance sheet operations are similar to the risks arising from on-balance sheet operations and that this risk should not be analyzed differently but as an integral part of banks overall risk exposure. Union Bank of Nigeria Plc commenced operation in the year 1917 after being authorized by the banking act of 1916, Union Bank of Nigeria Plc, known as colonial bank, opened for business in Nigeria in Lagos, than Jos and Port Harcourt.
In 1918, more branches were opened, namely Ebute-metta, Ibadan, Kano, Onitsha, Zaria and Burutu. In 1925; Barclays was formed to take over the activities of the colonial Bank along with two other British Banks. For the following 25 years, only three offices were added to the existing nine (9) branches which were at Aba, Gusau and Ijebu-ode, although, during the depression of 1939/1945 some branches were closed down. In 1950s, the bank (DCD) and a period of expansion commenced which led to the reopening of all offices that were closed. As a result of this development, the bank was able to open over fifty additional branches between 1959 and 1970.

On the implementation of the Nigeria enterprise promotion decree of 1972 and 1977, which empowered the government indigenization policy, the federal government of Nigeria acquire 51.672 of the shares while Barclays Bank Plc were left with 210% and 8.339 with the Nigerian public on the 22nd of March, 1978, the Federal Government ordered sanction against the bank as a result of the pronouncement of Barclays Bank International Limited of London on its activities in South Africa.

The sanction led to massive withdrawals by depositors creating a liquidity crisis for the bank. In 1979, Barclays Bank decided to sell 50% of its share to Nigeria, thus reducing the former equity holding to 20% consequently, the name was changed from Barclay’s Bank of Nigeria Limited to Union Bank of Nigeria Plc to reflect the new ownership structure of the Bank from 1979 to 1998, the ownership structure has remarked the same 51.67% for the ministry of finance (Federal Government) 28.33% for private Nigeria investors and 20% Barclay’s Bank but since 1999 to date, the ownership structure has been 100% by Nigeria without foreign interest.