CBN to Commence Phase Implementation of Basel III Accord
The Central Bank of Nigeria (CBN) has revealed plan to commence phase implementation of third Basel accord or Basel III standard to ensure safety and soundness of financial service risk management system.
The apex bank made this known in a recent publication posted on its website while noting that it would continue to adopt the risk-based supervisory (RBS) approach in the supervision of institutions under its regulatory purview.
The implementation of the Basel III framework is to reduce the risk of a build-up of excessive leverage in the banking system.
The framework would also provide a safeguard against excessive concentration as the CBN revealed plan to revise the existing Basel II guidelines on regulatory capital and supervisory review process in 2020/2021 fiscal years.
To this end, the CBN said it will issue guidelines covering liquidity coverage ratio (LCR).
The proposed standard is also expected to cover liquidity risk management (LRM) and internal liquidity adequacy assessment process (ILAAP), large exposures and regulatory capital definition among others.
Led by Bank for International Settlements (BIS), the third Basel Accord, an internationally regulatory framework with agreed set of measure developed in response to financial crisis of 2007-2009.
At banks earnings conferences call with analysts in the third quarter of 2019, some banks had said they are awaiting for CBN to formalise move to adopt the accord.
Though some lenders claimed that they have already taken up some aspects of the Basel III accord in their reports.
Isaac Okoroafor in text message sent to MarketForces in response to an enquiry on the subject said: “We have already taken up some aspects of Basel III such as minimum capital adequacy ratio and higher loss absorptive capacity for our banks”.
Analysts view that adoption of key aspects of the accord which is designed to strengthen supervision, regulation and risk management within the banking sector is gradual, albeit slow.
MarketForces recalled that the 2008/2009 shake off in the global financial system triggered the need for new risk management framework to ensure stability and provide necessary support points.
The Bank for International Settlement led other policy makers in the global financial sector to guide against similar occurrence in the future, the situation that gave birth to Basel III.
The Central Bank of Nigeria, while responding to MarketForces enquiry on Basel III position as at date, said it is considering issuing guidelines on liquidity aspect of the accord.
Financial experts however reckoned that regulation has intrinsic cost embedded in application on every system, and that has caused delay in full adoption in the Nigerian Banking system.
However, MarketForces enquiry into the adoption of Basel III by individual banks shows some mix reactions.
Banks with capital adequacy ratio that are at risk of falling below apex bank guideline dodged the enquiry made.
In March, 2019 CBN’s edition on guideline for stress testing on Nigerian Banks, the apex bank stated that it is cognizant of the changes introduced under Basel 3 capital framework.
It stated that the changes include measures aimed at increasing the level and quality of minimum capital requirements over time.
This also includes the prescription of additional capital buffers, introduction of leverage ratio as a supplement to the risk-based capital ratios.
“These changes have not been taken into consideration in the development of this guideline.
“This however should not prevent individual banks from early adoption of the full expectation of Basel 3 requirements and standards as part of their internal capital and liquidity management processes”, the report reads.
Access Bank Plc, the largest financial service by balance sheet size, said at its earnings call that it has started taken step towards full adoption.
Speaking at the earnings call on adoption of Basel III, Gregory Jobome the Executive Director of Risk Management said the Central Bank has been encouraging banks for a number of years to begin to adopt the elements of Basel III into their systems.
“Several of us have been doing that”, Jobome told analysts at the earnings call.
He stated that this includes things like liquidity coverage ratio, net stable funding ratio etc., which are meant to guide for the liquidity and quality of funding aspects of the bank’s operations.
Jobome hinted that some provisional guide was provided a couple of years ago, and more specific guidelines are still expected.
“I reckon we’ll have to look out for CBN to formalize this.
“But on our part, we’ve already invested in this for a good number of years now on all those key Basel III aspects, who have been internally operating them”, Jobome said.
Analysts said it is not clear if failure to adapt fully to guideline under the latest accord attract penalties.
The implementation, after the adoption of International Financial Reporting Standard 9 with expects credit losses provision, chugging Basel III would obviously demand that some lightweight banks visit the market to raise capital.
The third Basel accord requirements are instituted by the Bank of International Settlement (BIS) which is owned by 60 central banks.
Some banks are grappling with inadequate capital as shown in their results.
Pressure is also mounting on base capital as result of the need to meet the CBN’s loans to deposits ratio as well as impact of the local currency devaluation.
Analysts observed that many of the banks that did not serially meet LDR target may needs capital buffer to stretch forth towards meeting the ratio.
At the end of financial year 2017, the Group of Central Bank Governors and Heads of Supervision, which is the Basel Committee’s oversight body, endorsed the finalisation of Basel III reforms that will take effect from 1 January 2022.
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CBN to Commence Phase Implementation of Basel III Accord
