Obinna Chima examines the implication of the Basel Accord regulations on Nigerian banking. Generally, doing business involves risk and organisations that engage in transactions work very hard to mitigate it. Of course, the business of banking is not left out. For instance, when a bank lends out money, there is the risk that the borrower will not pay back the loan as promised. Hence, banks contend daily with operational, market, credit, and other forms of risks and mitigating such risks through effective framework promotes financial stability and economic growth. In Nigeria , since the resolution of the banking crisis, the financial market regulators have been working relentlessly not to lower their guard in view of the threats in the global financial market. To the regulators, sound policies as well as tailored and collaborative measures are needed to shield the market from another crisis and to avert another build-up of non-performing loans (NPLs) in the industry. To this end, the Central Bank of Nigeria (CBN) recently rolled out modalities for the implementation of both the Basel 2 and 3 accords in the country. The Basel accords are a set of agreements that provide recommendations on banking regulations in regards to capital risk, market risk and operational risk accepted globally. Earlier, the central bank had reviewed the risk weights assigned to some identified exposures in the industry and had also insisted that breach of the industry's single obligor limits without its approval would be regarded as impairment to capital. Explaining the rationale for such policy, the regulator had said the previous crisis in the banking industry exposed 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, needs to be properly managed through the establishment of sound risk management processes. As part of the supervisory process, the regulators routinely evaluate the overall health of the institution as well as their risk-management capabilities. For instance, the latest central bank "Financial Stability Report," showed that the wider adoption of e-banking channels increased the sphere of risks to banks and customers in light of the growing sophistication of organised crime. According to the report, the incidents of fraud and forgery reported to the CBN increased by 11.12 per cent to 2,478 involving N22.41billion in as at June 2013 , compared to the 2,230 cases involving N7.76 billion in the second half of 2012. Risk Measurement and Management > No doubt, risk management and measurement in the banking industry have improved beyond what it was about five years ago. But clearly, with the setting of deadline on the implementation of the Basel Accords, the central bank wants to push banks further. According to the CBN, banks are expected to commence a parallel run of both Basel 1and 2 minimum capital adequacy computation based on the requirement of the guidelines with effect from this month. It also stated that minimum capital adequacy computation under Basel 2 rules would commence in June 2014 . It declared that all banks are expected to adopt basic approaches for the computation of capital requirements for credit risk, market risk and operational risk. Specifically, on credit risk, it recommended that the standardised approach should be adopted, "adding that all forms of corporate claims would be treated as unrated. In the same vein, on market risk, the central bank directed that the standardised approach should be adopted, just as on operational risk, it recommended that the Basic Indicator Approach (BIA) should be adopted. It explained: "Within the first two years of the adoption of these approaches under Pillar 1; it is hoped that an effective rating system would have developed in Nigeria . "Banks and banking groups are projected to have gathered more reliable data and gained more experience that would prepare them to consider the adoption of more sophisticated approaches. "The adoption of the Standardised Approach for Operational Risk and other sophisticated approaches will however be subject to the approval of the CBN." It also stated that the guidance notes would be applicable to all banks and banking groups licenced to operate in Nigeria on both a solo as well as consolidated basis. The minimum capital requirement was however retained at 10 per cent and 15 per cent respectively for local and internationally active banks. "They specify approaches for quantifying the risk weighted assets for credit risk, market risk and operational risk for the purpose of determining regulatory capital. The computations are consistent with the requirements of Pillar 1 and Basel Accord (International Convergence of Capital Measurement and Capital Standards)," according to the apex bank. It added: "Although the guidelines comply significantly with the requirements of Basel 2/3 accord, certain sections were adjusted to reflect peculiarities of our environment. From time to time, the CBN will issue capital implementation notes to clarify its expectations on compliance with the technical provision of the regulation. "In line with Basel 2 Pillar 2, banks are reminded of the importance of comprehensive risk management policies and processes that effectively identify, measure, monitor and control their risk exposures in addition to having appropriate board and senior management oversight." Ensuring Effective Implementation To the Head of Research at BGL Securities Limited , Mr. Femi Ademola , Nigerian banks might on the right part for the implementation of Basel 2. He noted that for a long time now, some of the banks had arranged their risk management system according to the risk classification in the first pillar of Basel 2 (Credit Risk, Market Risk and Operational Risk). This, Ademola argued would aid their measurement of capital at risk and the calculation of regulatory minimum capital. "The requirement of the second pillar is mostly regulatory which I think the CBN is already doing quite well. The third pillar which focuses on market discipline is a fall out of the first two pillars. "It requires the transparency in the calculation of the regulatory capital and the supervisory review by the regulator. Hence, once we are able to cross the first two pillars, the third one is easily achievable," he declared. But Ademola pointed out that Basel 3 might require changes to some of the current macro-prudential indicators for the banks, suggesting that additional capital may be required to meet the adopted capital requirement while leverage and liquidity ratios may change. Also, he noted that the approach to calculating banks' capital adequacy ratio may also change. "The likely challenges to implementation Basel 2 and 3 include knowledge gap, availability of skillful employees, cost and the availability of new capital (if required by the banks) and the willingness of the regulators to ensure its complete implementation," Ademola added. He urged the CBN to make proper consultation and ensure that implementation of both Basel 2 and 3 would not cause any disruption in the banking system. Furthermore, he said the implementation should be done with proper diligence, integrity and caution with the aim of ensuring complete and hassle-free implementation. To a research analyst at Afrinvest Securities Limited , Mr. Ayodeji Ebo , implementing the Basel Accords would make deposit money banks in Nigeria more efficient and make it easier for the to access capital from the global market. "So the issue of what led to the collapse of some banks few years back may not happen. Also, for those that want to expand, it will be easier for them. Definitely because most of them have international presence, it is going to be a plus for them because the international market believes so much in those Basel Accords and they will be able to access more credit line," he explained. However, Ebo pointed out that the implementation might be very stringent for banks. "It is something that is going to stress the banks because some of them may need more capital to meet up with the requirement. So we may see some of them going to the market to raise more tier 1 capital," he added. He also called for capacity development in the industry to ensure effective implementation.
Most Popular Stories
- Apple, HP, Intel May Take a Hit from Slowdown in Smartphone Sales Growth
- FDIC Files Lawsuit on Behalf of Banks Allegedly Hurt by Libor Scandal
- Some California Cities Seeking Water Independence
- Motley Crue's Nikki Sixx Marries Model Courtney Bingham
- Jack Daniel's Resists Changes to Tenn. Whiskey Law
- Chinese e-Commerce Giant Alibaba Gears for IPO in U.S.
- Crimea Seeks Financial Integration With Russia
- E.U. Puts Sanctions on Russia, Ukraine Officials
- Will Missing Malaysian Jet Prompt Aviation System Change?
- Chile Shaken by Major Aftershock