The new framework would help check disruptions the financial system and economic activity in the country.
The Central Bank of Nigeria (CBN) has unveiled a supervision framework to monitor the operations of the country’s top eight banks and insulate them from the distress syndrome that affected most financial systems in the aftermath of the 2007 global financial meltdown.
The draft framework for Supervision of Domestic Systematically Important Banks in Nigeria, issued by the CBN in May, identified First Bank of Nigeria Plc, United Bank for Africa Plc, Zenith Bank Plc, Access Bank Plc, Ecobank Nigeria Plc, Guaranty Trust Bank Plc, Skye Bank Plc, and Diamond Bank Plc as the banks that must be closely monitored to ensure that they did not catch the distress bug.
Systematically Important Banks (SIFIs) include banks, insurance, and other financial institutions whose distress or failure, as a result of their size, complexity and systemic interconnectedness, is capable of significantly disrupting the wider financial system and economic activity in the country.
Following the 2007 global financial crisis, the CBN and the Nigeria Deposit Insurance Corporation (NDIC), as the banking sector regulators, adopted a number of measures to rescue the financial system and ensure stability, including raising banks’ minimum capital base to N25billion and granting bailouts and guarantees to distressed banks.
However, the CBN, which considered these measures inadequate to ensure stability in the system, said the draft framework would create a regime of incentives for stronger risk management practices in the affected banks to reduce systemic risks and limit the impact of such threats to the financial system.
Under the new framework, the Central Bank said the operations of SIFIs must be closely monitored and regulated, to limit the economic impact of bank distress, as their failure or collapse could negatively impact the financial system and disrupt the country’s real economy.
Available industry data showed that the eight banks, measured in terms of size, account for more than 70 per cent of the industry’s total asset, credits and deposit liabilities, in addition to their constituting more than 60 per cent of the industry net-interbank transactions.
With capital adequacy ratio (CAR) for the country’s national/regional and international banks currently at about 10 and 15 per cent respectively, the SIFIs are required to maintain a minimum CAR of 15 per cent and a ceiling of not more than 25 per cent of their qualifying capital.
In addition, the banks would also be required to set aside higher loss absorbency (HLA) or additional capital surcharge of 1 per cent, to ensure that they possess higher shares of their balance sheets funded by instruments that re-enforce their strength.
To determine the capacity of the banks to absorb losses during adverse economic and financial conditions, the framework indicated that the regulatory authorities would conduct stress test of their capital and liquidity adequacy, the result of which would be used to support changes to the banks’ capital structure.
Equally, the banks would be required to develop and submit to the CBN at the beginning of every year contingency and resolution plans that incorporate resolution and winding-down plan, in addition to quarterly disclosures of their financial condition and risk management activities.
The required disclosures shall cover governance and strategies, capital adequacy and weighted assets, liquidity/funding, market, credit, operational and other identified risks, while the activities of the top 100 users of funds should be closely monitored in relation to the industry.
Other issues expected to be given close monitoring and reported by the banks include those on corporate governance; half-yearly interaction between regulators and banks’ Board of Directors and management to address issues of supervisory concern and other issues; analysis of trends and comparison of Off-Balance Sheet (OBS) to the total asset and credits.