News Column

CBN Extends Parallel Implementation of Basel II

July 7, 2014

Obinna Chima

Following the initial challenges observed in the parallel run of the Basel II accord, the Central Bank of Nigeria (CBN) has directed banks to continue its implementation for an additional period of three moths.

According to the central bank, the full adoption of the Basel accord will now commence on October 1, 2014.

The central bank stated this in a letter to all banks and discount houses with reference number "BSD/GCA/BAS/CON/01/115," dated July 02, 2014.

The letter titled: "Extension of Parallel Run of Pillar I of Basel II Implementation," signed by the Director, Banking Supervision of the CBN, Mrs. Tokunbo Martin, was posted on the banking sector regulator's website at the weekend.

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.

The CBN had last year directed banks to commence a parallel run of both Basel 1and 2 minimum capital adequacy computation based on the requirement of the guidelines with effect from January 2014. It had also stated that minimum capital adequacy computation under Basel 2 rules would commence in June 2014.

But in the latest circular, the central bank explained that "the initial challenges observed in the parallel run have necessitated for an extension of the parallel run particularly with regards to the requirements of reporting capital charge for credit, market and operational risks.

"Consequently, banks are hereby directed to continue the parallel run for an additional period of three months while the full adoption will commence on 1st October, 2014."

Meanwhile, it urged banks to use the period to reassess their current capital levels with a view of complying at full adoption, with the minimum capital requirements.

In addition, banks were also reminded to continue to submit their monthly returns on or before the fifth working day after each reporting month. Specifically, on credit risk, the central bank had 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."

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Source: AllAfrica

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