Nigeria: Making Sense of the CBN's New Capital Adequacy Requirements

11 February 2013
opinion

Last week, the Central Bank of Nigeria (CBN) toughened its regulatory regime. Its review of risk weights on certain exposures in the computation of capital adequacy essentially did four main things. (1) It increased the risk weight on direct lending to government from 100% to 200%; (2) where a bank's exposure to a particular sector of the economy exceeds 20% of its total lending, the bank in question is now required to apply a risk weight of 150% to its entire portfolio; (3) where banks exceed the CBN's stipulated large exposure limits (to prevent a bank's over-exposure to a client or group of connected clients) the central bank will henceforth treat such infractions as impairments to the respective bank's capital; and (4) the CBN tightened the circumstances under which credit transactions may take place between "banks' related parties within a holding company structure".

My first reaction to these policy directives was near panic. Three considerations stood out for me. First, given the sustained clamour for the apex bank to lower its policy rate (in order it is argued to give fillip to a recovering economy, or, what is essentially the same argument, in order not to restrict the economy's potential for growth), this represents a tightening of monetary conditions. In an economy that slowed down considerably last year, despite the gaping holes across its every nook and cranny, my question was "Do we need this new imposition?"

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