CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The roles of commercial banks play in the process of economic development in every country are crucial. They through financial intermediation increase the levels of national savings and investments by mobilising idle funds from surplus spending units (savers) and channel them to deficit spending units(borrowers) for investments in the economy . (UGBAJA 1999) By playing these roles within a particular country, the independence of global economics created the need for global interbanking, a trend which in turn emphasizes the need for the stability of the banks involved in intercontinental banking transactions. Also, banking business carries a lot of risks and banking public needs assurance about the safety of their confidence in the banking institutions.
The need for supervision and control of commercial banks activities is to ensure that they adhere to the stipulated monetary policies, rules and regulations as well 2 as accepted ethical conducts. However the major contributing factor that has led to the failure of Nigerian banks in the past can be described as moral hazard (adverse incentives) Moral hazards or adverse incentives are a concept with relevance to a variety of principal agent relationships characterized by asymmetric information. The moral hazard concerns the adverse incentives on banks chief executives to act in ways which are contrary to the interests of the banks creditors (mainly depositors or the government if it explicitly or implicitly insures deposits) by undertaking risky investment strategies (such as lending at high interests rates to high risk borrowers) which, if successful, would jeopardize the solvency of the bank. Bank owners have incentives to undertake such strategies because with limited liability, they bear only a portion of the downside risk but stand to gain through higher profits, a large share of the upside risk. In contrast, the depositors (or the deposit insurers) gain little from the upside risk but bear most of the downside risk. The inability of depositors to adequately monitor bank directors, because of the asymmetric information allows the latter to adopt investment strategies while entail higher levels of risks.
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