20 February 2013

Nigeria: CBN Reviews Computation of Capital Adequacy for Banks

As part of efforts to entrench risk management in banks, the Central Bank of Nigeria (CBN) Tuesday said it had reviewed the risk weights assigned to some identified exposures in the industry.

The banking sector watchdog said this in a letter with reference number: "BSD/DIR/GEN/LAB/06/003,"dated January 31, 2013, a copy of which was posted on its website.

The letter titled: "Review of Risk Weights on Certain Exposures in the Computation of Capital Adequacy," was approved by the Director, Banking Supervision, CBN, Mrs. Tokunbo Martins.

The central bank insisted that breaches of the industry's single obligor limits without its approval would be regarded as impairment to capital.

It explained that the risk weight assigned to direct lending to local governments, states, ministries, departments and agencies (MDAs) has been increased from 100 per cent to 200 per cent.

It also stated that investments in Federal Government of Nigeria Bonds shall continue to attract zero per cent risk weight, adding that State Government Bonds that meet the eligibility criteria set out in the Guidelines for Granting Liquidity Status for State Government Bonds would continue to be risk weighted at 20 per cent.

"Where the exposure to any industry economic sector (as defined by the International Standard Industrial Classification of Economic Sector as issued by the CBN) is in excess of 20 per cent of the total credit facilities of a bank, the risk weight of the entire portfolio shall be 150 per cent.

"Total exposure to a particular industry would include off-balance sheet engagements in which the bank takes the credit risk," the central bank warned.

For credit transactions, the apex bank stated that banks' related parties within a Holding Company (HoldCo) structure shall include, among others, the Financial Holding Company (FHC), and other subsidiaries within the group.

It added that credit transactions by the bank within the group would be treated as follows: "FHC lending to a bank within its group - the bank should treat the loan as a liability.

"Credit by a bank to its FHC - this would be regarded as a return of capital and deducted from the capital of the bank in computing its capital adequacy. Bank lending to subsidiaries within its group - where the credit is fully secured, it would be assigned a risk weight of 100 per cent; otherwise it would be deducted from the capital when computing capital adequacy."

Explaining the rationale for the review, the bank said the recent crisis in the banking industry had highlighted several weaknesses in the system, key of which was the excessive concentration of credit in the asset portfolios of banks.

According to the central bank, the management of the concentration, or pools of exposures, whose collective performance might potentially affect a bank negatively, needed to be properly managed through the establishment of sound risk management processes.

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