Written by Systemically Important Banks (SIBs) are banks that regulators consider highly important because their failures could cause instability in the financial system.
In this post, we will discuss the regulatory frameworks that guide SIBs in Nigeria.
But before looking at the regulatory framework that guides SIBs, let’s first define Systemically Important Banks(SIBs).
SIBs in Nigeria are defined as banks with total assets of at least 5% and minimum total credits and deposit liabilities of 6% each of the banking industry in the past six months.
In Nigeria, the ZAGUF banks, consisting of Zenith Bank, Access Bank, Guaranty Trust Bank(GTbank, United Bank For Africa(UBA), and First Bank of Nigeria Limited, all meet the definition of a Systemic Important banks.
The Central Bank of Nigeria (CBN) imposes additional Supervisory requirements on SIBs to ensure they remain financially stable.
These supervisory requirements are higher loss absorbency, liquidity standards, stress testing, recovery and resolution planning, enhanced supervision, and disclosure requirements.
Higher loss absorbency
Banks in Nigeria must maintain a capital adequacy ratio (CAR) of 10% or 15%, depending on their banking license.
Regional or national banks must hold a minimum Capital Adequacy Ratio of 10%, while banks designated as international banks must hold a minimum CAR of 15%.
However, if a bank is designated as a Systemically Important Bank (SIBs), then it must hold a minimum capital Adequacy ratio of 15%, out of which at least 75% of the bank’s qualifying capital must be Tier 1 capital.
In other words, Tier 2 capital should not constitute more than 25% of the qualifying capital.
Apart from the minimum capital adequacy ratio, SIBS are also required to maintain additional capital buffers, known as the Higher Loss Absorbency (HLA).
The Higher Loss Absorbency is an additional capital surcharge of 1% to the minimum capital requirement and must be met with Common Equity Tier 1 (CET1) capital.
The Higher Loss Absorbency framework is an important part of the supervisory framework for SIBs in Nigeria.
It is intended to ensure that SIBs have sufficient capital buffers to absorb losses, which is essential for maintaining financial stability and avoiding the contagion effects of these banks’s failure.
The aim of setting a Higher loss Absorbency policy is to enhance the going concern loss absorbency of Systemically Important Banks and reduce the probability of their failure.
Liquidity standards
The current liquidity standard and ratio for banks shall also be applicable to Systemically Important Banks.
However, SIBs shall be subject to more stringent liquidity requirements than other banks.
Liquidity standards are regulatory requirement set by the Central Bank of Nigeria( CBN) that required Systemically Important Banks (SIBs) to maintain adequate liquidity so that they can be able to meet their short-term obligations.
Under the CBN’s liquidity framework, SIBs are required to maintain a minimum Liquidity Ratio (LR) of 30%.
The LR measures the ratio of a bank’s liquid assets to its total deposit liabilities over a 30-day period.
This means that SIBs must hold enough high-quality liquid assets, such as cash to cover at least 30% of their total deposit liabilities over the next 30 days.
Stress testing
Stress testing is a supervisory framework used to evaluate the resilience of systemically important banks (SIBs) against adverse economic scenarios or events.
The CBN requires SIBs to conduct stress tests on their capital adequacy, profitability, and liquidity on a quarterly basis, and to report the results to the regulator.
The results of the stress test would then be used to make recommendation on appropriate changes to the capital structure of the bank.
One major reason for subjecting systemically Important Banks to stress test is to assess their ability to withstand adverse economic conditions.
Indeed, the result of the stress tests are used to identify weaknesses in the SIBs’ balance sheets and to make recommendations on how to strengthen their risk management practices
Recovery and resolution planning
Another supervisory framework is the recovery and resolution planning.
This framework required Systemically Important Banks to develop specific recovery plan, which shall be submitted to the Central Bank of Nigeria and Nigeria Deposit Insurance Corporation by 1st January of every year.
The recovery plan should outlines the actions the bank would take to restore its financial viability in the event of severe stress or distress.
The recovery action that could be taken by a SIB include disposing its assets, raising new capital, and restructuring its operations.
By requiring SIBs to develop credible recovery and resolution plans, regulators aim to to reduces the likelihood of a disorderly failure that could have significant negative impacts on the wider financial system.
Enhanced supervision
SIBs in Nigeria are subject to enhanced supervision compared to other Banks.
That is, they are subject to additional supervisory oversight and monitoring.
Due to their systemic nature, systemic Important Banks are subjected to enhanced risk management practices, stronger internal controls, more rigorous reporting, and disclosure requirements.
Additionally, the Central bank usually carried out monthly monitoring of the key performance indicators of the SIBs to ensure their safety, soundness and thr going concern status of the banks.
Banks shall be expected to provide high quality data to the regulatory authorities for the purpose of the enhanced supervision.
In the event that an SIB has a High Composite Risk rating, half-yearly meetings shall be held with the board and management to address issues of supervisory concern.
Disclosure requirements
The SIBs shall make quarterly disclosures of their financial condition and risk management activities to the regulators as prescribed by the Central Bank of Nigeria.
The CBN require SIBs to disclose information related to:
- Risk governance and risk strategies/business model
- Market risk
- ICAAP Policy and Computation
- Liquidity/Funding
- Capital adequacy and risk weighted assets
- Credit risk
- Operational risk
- Other identified risks
By requiring SIBS to disclose this information, the CBN aims to identify potential risks and vulnerabilities, and make recommendation on the best way to solve the mitigate the risks.
