A THEORETICAL STUDY ON THE FAILURE OF LEHMAN BROTHERS AND MERRIL LYNCH: A LESSON FOR BANKING INSTITUTIONS IN NIGERIA

Abstract

The bankruptcy of Lehman Brothers and Merril Lynch is conceptually examined as a lesson for the banking institutions in Nigeria. Therefore, institutional failure was the cause of the current financial system instability in Nigeria, particularly in the banking sector. Nigerian financial experts believed that the demise of the two banks served as a strong enough warning to the country's banking sector. Thus, the study shows that the two banks' ability to predict their future depended solely on their size and age rather than on the effectiveness and efficient management of risky assets. As a result, normal lending practices are not used; instead, subprime mortgage arrangements that lack collateral security are used. Refinancing has become more challenging due to the falling home prices and insufficient securitization technologies. This advises the regulatory authorities to use more unconventional techniques of gathering classified information in addition to the traditional tools of bank monitoring. To adapt to the local situation, financial institutions should retrain and train their staff. It is preferable to implement conventional lending practices than to rely on subprime mortgage management that lacked collateral security. To maintain efficient oversight and sound risk management practices, the Central Bank of Nigeria (CBN) should take the initiative.