Benchmark for Basel III Implementation by Deposit Money Banks in Nigeria

OVERVIEW

Following the gradual global economic recovery. The Central Bank of Nigeria (CBN) guidelines to all banks in Nigeria for Basel III Implementation by all Deposit Money Banks on 2nd September 2021. The Circular seeks to point to all banks on the Guidelines for the implementation of the Basel III standard which introduces new capital and liquidity standards to strengthen the regulation, supervision, and risk management of the whole of the banking and finance sector.

The Basel III accord was established by the members of the banking Committee on Banking Supervision following the impact of the 2007 global financial crisis on Banks. The objective of this accord is to improve on the deficiencies of Basel II and to introduce an additional layer of common equity (a capital conservation buffer) for banks and to strengthen supervisory requirements. In the recent CBN circular on the guidelines for the implementation of Basel III by Deposit Money Banks in Nigeria the following Guidelines under-listed.

KEY HIGHLIGHTS

  • Regulatory Capital

All banks are required to hold a capital conservation buffer of 1% in addition to the minimum capital adequacy ratio(CAR) and Common Equity Tier 1 Capital Ratio and a Higher Loss Absorbency (HLA) requirement of 1% for Domestic Systematically Important Banks

The summary of the regulatory capital requirement is as shown below:

Regulatory Capital Ratio National/Regional banks International/ Domestic Systematically Important Banks
Common Equity Tier 1 Capital Ratio 7% 10%
Tier 1 Capital Ratio 7.5% 11.25%
Capital Adequacy Ratio 10.0% 15.0%
Capital Conservation Buffer 1.0% 1.0%
Countercyclical Capital Buffer To be Determined by CBN from time. To be Determined by CBN from time.
  • Liquidity Coverage Ratio(LCR)

The LCR aims to promote short-term resilience of the liquidity risk profile of reporting entities by ensuring that they have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately into cash in private markets to survive a significant stress scenario lasting 30 calendar days. Banks are required to comply with the minimum LCR on an on-going basis to help monitor and control their liquidity risk. Reporting entities are required to submit their returns to the CBN in the manner prescribed below.

Reporting Details Solo Basis Consolidated Basis
Reporting frequency Monthly Quarterly
Reporting date Month-end Quarter-end
Reporting Coverage 30 calendar days from reporting date 30 calendar days from reporting date
Submission Deadlines 5 days after the last day of each month 5 days after the last day of each month
  • Leverage Ratio(LeR)

The goal of CBN is to constrain the build-up of excessive on-balance-sheet and off-balance-sheet leverage in the banking system to avoid destabilizing effects of deleveraging processes which can damage the broader financial system and the economy. The banks are required to use solely Tier 1 capital for the capital measure for the as set out in the CBN’s revised guidance for regulatory capital.

It is necessary for banks to maintain a leverage ratio of 4% at all times. Domestic Systemically- Important banks are required to maintain an additional leverage ratio buffer of 1% above the minimum at all times and this should be in the form of Tier 1 capital. Bonus payment constraints will be placed on D-SIBs which do not meet the leverage ratio buffer requirement. Banks are expected to submit their LeR report monthly for single entities and quarterly for consolidated companies with a maximum extension limit of 5 days.

  • Large Exposures(LEX)

This guideline focuses on eliminating variation in practice across banks in their measurement of exposures to a single counterparty or the factors to be taken into consideration when assessing whether separate legal entities form a group of connected counterparties.

CBN requires that the sum of all exposure values of banks to a single or group of connected counterparties must not be higher than 20% or 50% of the bank’s shareholders’ funds unimpaired by losses for a commercial or merchant bank respectively.

Total outstanding exposures (on and off-balance sheet) by banks to all tiers of government and their agencies must not exceed 10% of their credit portfolios. It is required that aggregate large exposures in any bank should not exceed 8x the shareholders’ funds unimpaired by losses, with an exception to breaches of the limit, which must be communicated promptly to the CBN and must be rectified quickly.

CONCLUSION

Implementation of Basel III accord by Nigerian Banks will foster transparency, accountability, and best practices in the banking and financial sector. Furthermore, it will align and strengthen the supervisory and regulatory practice in Nigeria.

2021-12-13T13:49:54+01:00

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