Stress tests conducted by the Central Bank of Nigeria (CBN) on 23 Deposit Money Banks (DMBs) have shown that 'six small banks' Capital Adequacy Ratios (CARs) fell below regulatory threshold, its Deputy Governor, Financial System Stability, Dr. O.J. Nna has stated. The report, contained in the CBN Financial Stability Report released yesterday, stated that for systemic and peer assessments, banks were classified based on asset size into large banks, which are those with assets greater than N1 trillion; medium banks, those with assets greater than or equal to N500 billion but less than N1 trillion and small banks, those with assets less than N500 billion. As stated by him, the unnamed small banks showed significant vulnerability to the shock of a 200 per cent Non-Performing Loans (NPL) increase as their CAR fell to 8.85 per cent. Nna stated that under this scenario, 16 banks maintained CARs above 10 per cent, while five lenders had CARs less than or equally to 10 per cent but greater than or equal to five per cent. Furthermore, one bank had CAR less than five per cent but greater than or equal to zero per cent and one other bank had CAR less than zero per cent. CBN pegs CAR, which is the ratio of a bank's capital to its risk, at 10 per cent for banks operating only in Nigeria and 15 per cent for banks with foreign subsidiaries. The stress test. conducted in December last year, captured the idiosyncratic nature of individual bank's balance sheet and macro-prudential concerns, using both the bottom-up and top-down approaches specified in the modified International Monetary Fund (IMF’s) stress test framework, the Deputy Governor stated. Nna stated assessments of the resilience of the sector were done by applying a series of exceptional but plausible shocks and scenarios, which effectively translated single factor and multifactor shocks into banks' balance sheets. He added that credit, liquidity, interest rates, foreign exchange rates, and foreign exchange trading risks were some of the risk channels used in the exercise. “The resilience of the banking system was assessed against a defined benchmark of 10 per cent CAR, 30 per cent liquidity ratio, and five per cent NPL. They were also assessed on the basis of return on asset (ROA) and return on equity (ROE),” he stated. As stated by him, stress tests also showed that banks were, however, more sensitive to credit concentration and exchange rate risks than other risks. He stated the report highlighted the challenges to financial system stability in general, as well as, the implications for the banking sector soundness in particular. He said, “In ensuring financial system stability, the CBN employed not only macro-prudential policy instruments, but also adopted risk based supervision approach to strengthen banking sector resilience. The report focused on the resilience of the financial system to withstand uticipated adverse shocks, while ensuring the continued smooth functioning of the system’s financial intermediation processes. A stable financial system should aim at facilitating sustainable economic growth and development necessary for improved standard of living and enhanced economic conditions. The critical role of a stable and sound financial system in the growth and development of the nation, can therefore, not be over emphasized.”
