The Central Bank of Nigeria (CBN) has conducted a stress test revealing that eight commercial banks are currently below the required Capital Adequacy Ratio (CAR) for international authorization. The affected banks are now under pressure to boost their capital base due to the gap created by the depreciation of the naira against the dollar and other foreign currencies.
According to the CBN’s 2021 guidelines, Deposit Money Banks were mandated to maintain a prudential CAR of 10% for national and regional banks, while those with international authorization were required to uphold a 15% regulatory CAR. However, the recent report from the CBN indicates a decline in the banking system’s CAR, dropping to 11.2%, which is 3.0% below the 15.0% threshold set for banks with international authorization.
The decline in CAR is attributed to a decrease in total qualifying capital relative to increased risk-weighted assets due to the depreciation of the naira following the adoption of a market-determined exchange rate policy. This situation reflects the challenges faced by these institutions.
The stress test, which focused on the banks’ capital strength and risk profile, aimed to assess their financial health and ability to withstand adverse economic conditions and shocks. Specifically, the CAR measures the proportion of a bank’s capital to its risk-weighted assets, a crucial factor in determining a bank’s financial stability.
Results from the stress test revealed that among the affected banks with international authorization, their CAR was lower than the minimum regulatory requirement set by the CBN. This suggests that these banks may have insufficient capital to meet potential losses during challenging economic conditions, which could impact their overall financial stability.
The CBN’s disclosure emphasizes the need for appropriate measures to address this issue. It could lead to regulatory action, such as requiring the affected banks to raise additional capital or implement strategies to strengthen their financial position, mitigating potential risks to the banking sector and the economy.
CBN Governor Olayemi Cardoso highlighted plans to introduce new capital requirements for banks at the recent annual dinner of the Chartered Institute of Bankers of Nigeria. He emphasized the importance of fortifying the banking industry for future challenges, considering the evolving economic landscape.
The report also noted a positive trend in banks’ asset quality, with a marginal decrease in Non-Performing Loans (NPLs) and a significant rise in the Industry Liquidity Ratio (LR), indicating banks’ capacity to fulfill their financial obligations. However, the pivotal need for banking institutions, particularly those with international authorization, to bolster their capital adequacy is underscored by the CBN’s disclosures.
