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Capital Computation Adjustment to Protect Banks from Shocks’

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IMAGE: Razia Khan, the Managing Director/Head, Africa Research, Standard Chartered Bank »


The recent adjustment of the modalities for computing banks’ regulatory capital by the Central Bank of Nigeria (CBN) will provide a strong buffer against external shocks for the financial institutions, according to market analysts.

Specifically, analysts at Afrinvest Securities Limited, a Lagos-based investment and financial advisory firm noted that in light of the bank's exposure to the Eurobond market, the prospects of volatility or depreciation in foreign exchange can be significantly absorbed with the latest regulatory measure.

The central bank had highlighted details on the exclusion of non-distributable regulatory reserves and other reserves in the computation of regulatory capital of banks and discount houses. This was established in a bid to raise the quality and loss absorbency of the banks' capital base.

The regulatory risk reserves accommodates the difference between the allowance for impairment losses on loans and advances based on CBN's prudential guidelines compared with the loss incurred model used in calculating impairment charges under IFRSs.

According to the policy, the regulatory risk reserve would be excluded from the regulatory capital when computing the Capital Adequacy Ratio (CAR)
However, Afrinvest Securities argued that the policy would further exert pressure on banks' CAR in the third quarter of 2014.

The CAR requirement for Systemically Important Banks (SIBs) had been raised to 16 per cent, while the country has partially adopted Basel II.

“These policies combined prompt the need for banks to bolster qualifying capital to keep CAR above the regulatory benchmark.mThe recently introduced 33.3 per cent tier-2 ceiling of total tier-1 capital, places a restriction on some of the banks that intends to raise further tier-2 capital in the second half of 2014. Hence, may be forced to explore the tier-1 capital (equity) raising option,” it added.

A key benefit of these policies is the increased confidence of foreign banks in Nigerian banks, based on the stringent capital requirement, the analysts pointed out.

This they said is in tandem with global counterparts. The policy would also bring about increased capital-raising for financial institutions, the Managing Director/Head, Africa Research, Standard Chartered Bank, Razia Khan had said.

“More forex-denominated issuance is still anticipated. Moreover, the cap on tier-2 capital will mean, potentially, more equity capital raising, encouraging more long-term, ‘stickier’ inflows.

“Tier-2 debt issuance has already increased, with an increasing number of banks able to raise their US dollar funding,” Khan argued.

Article Credit: Thisdaylive

Updated 4 Years ago

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Tags:     CBN     CAR     IFRSs     SIBs     Razia Khan