A liquidity
stress test conducted by the Central Bank of Nigeria (CBN) has revealed
that capital position of ‘three small banks’ have fallen below
regulatory capital requirement.
The test, contained in the CBN Financial Stability Report released
yesterday, showed the Capital Adequacy Ratios (CARs) of the affected
banks
were below five per cent regulatory threshold.
The three banks are not among the domestic systemically important banks (D-SIBs), it said.
The report, which measured the lenders’ positions as at June this
year, showed that the number of banks with CAR less than five per cent
also increased from zero to three from December 31, 2014 to June 30,
2015. The CAR is a ratio of a bank’s assets to its risks
According to CBN’s Director, Financial Policy and Regulation
Department, Kelvin Amugo, the liquidity stress test was conducted using
the Implied Cash Flow Analysis (ICFA) and the Maturity Mismatch/Rollover
Risk approaches to assess the resilience of the banking industry to
liquidity and funding shocks.
He said the ICFA approach assessed the ability of the banking system
to withstand unanticipated substantial withdrawal of deposits, as well
as short-term wholesale and long-term funding over a 5-day and
cumulative 30-day periods, with specific assumptions on the fire sale of
assets.
The report said liquidity ratio (LR) of the Nigerian banking industry
decreased by 6.5 percentage points to 39.3 per cent from the 45.8 per
cent December 2014 position. The decline in the LR position was driven
mainly by the large and medium banks with 6.5 and 7.4 percentage points
decrease respectively from their December 2014 LR position to 36.9 per
cent and 45.5 per cent respectively. This decline may be traced to the
sustained tight monetary policy stance of the CBN.
The test results revealed that the industry liquidity ratio declined
to 9.30 and 6.10 per cent, from 39.3 per cent baseline position after
the five-day and cumulative 30-day shocks, respectively. The result of
the stress tests indicated potential vulnerability to liquidity risk in
the event that these scenarios crystallized.
“Overall, there was an improvement in the baseline CAR of the
Nigerian banking industry at end-June 2014 compared to the December 2014
position. The baseline CAR rose by 0.23 percentage point over the
December 2014 position to 17.38 per cent at end-June 2015. This was
driven mainly by improvements in the baseline CAR of the large banks
which rose by 1.03 percentage points over their December 2014 position
to 18.56 per cent at end-June 2015,” the report said.
“Equally, the number of banks with CAR greater than the 15 per cent
prudential hurdle rate for international banks increased from 13 at
end-December 2014 to 16 at end-June 2015. However, the number of banks
with CAR less than five per cent also increased from zero to three over
the period”.
Commenting on the report, CBN Governor, Godwin Emefiele, said it
captures the headwinds remain, given that oil exports from Iran and
lower global demand will further dampen oil prices, thus portending
continued decline in oil revenue accruing to Nigeria.
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