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Stress Test: Three ‘Small Banks’ In Danger

The Central Bank of Nigeria has warned that three ‘small banks’ are currently unhealthy

The Central Bank of Nigeria (CBN) has reported that “three small banks” operating in the country are in an unhealthy position and therefore draws attention to the need to beef up their capital adequacy. This revelation was made in the apex bank’s Financial Stability Report for June 2015 published over the weekend.

It said that a liquidity stress test conducted by it on the operating deposit money banks (DMBs) 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. The Citizen/Agency report.

–   Sam Diala with agency reports

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