Bank failure: CBN mulls higher minimum capital ratio
In view of challenges facing the banking sector due to unfavourable economic situations, the Central Bank of Nigeria (CBN) said it is considering prescribing a higher level of minimum capital ratio for each bank under the Pillar 2 banking framework on the basis of their respective risk profiles and their risk management systems.
This is just as the bank has released Guidance Notes on Supervisory Review Process for Non-Interest Financial Institutions (NIFI). This adopts a risk-based approach to supervisory review process in line with Basel 2 Pillar 2 and Islamic Financial Services Board’s (IFSB) Standard Number 16 issued for Islamic Financial Institutions.
In a series drafts available on the bank’s website, the central bank in terms of the Pillar 2 requirements of the capital adequacy framework, noted that banks are expected to operate at a level well above the minimum capital requirement.
Meanwhile, the minimum capital guideline lays down the new supervisory regulations for assessing the capital adequacy levels of all banks in Nigeria.
The rules governing regulatory capital, its components and required deductions to the capital levels, shall be applied by banks for assessment of qualifying capital, it stated.
According to the guidelines, banks are required to maintain a minimum regulatory capital adequacy ratio (CAR) of 10 per cent/15 per cent plus 1 on an on-going basis.
“The Central Bank of Nigeria (CBN) will take into account the relevant risk factors and the internal capital adequacy assessments of each bank to ensure that the capital held by a bank is commensurate with the bank’s overall risk profile.
“This would include, among others, the effectiveness of the bank’s risk management systems in identifying, assessing/measuring, monitoring and managing various risks including interest rate risk in the banking book, liquidity risk, concentration risk and residual risk,” the document read in part.
Qualifying capital is broadly classified as Tier 1 and Tier 2 capital. Elements of Tier 2 capital it said will be limited to a maximum of one-third (i.e. 33.33 per cent) of Tier 1 capital, after making deductions for goodwill, deferred tax asset (DTA) and other intangible assets but before deductions of investments.
For an instrument to be treated as paid-up share capital, it must represent the most subordinated claim in liquidation of the bank. Other criteria are that: the investor is entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been paid in liquidation (that is, has an unlimited and variable claim, not a fixed or capped claim); the principal is perpetual and never repaid outside of liquidation; Where a bank issues the capital instrument in a foreign currency, the capital instrument shall be re-valued periodically (at least monthly) in terms of Naira at the prevailing exchange rates CBN stated.