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CBN conducts stress tests on nation’s banks


CBN building

CBN building

• It’s a routine examination, say analysts
• ‘What can happen to a weak bank’

To assess the strength of the nation’s banks, the Central Bank of Nigeria (CBN) is currently conducting stress tests on them. But depositors need not worry. The tests are routine, according to stakeholders.

Top-ranking sources in the banks told The Guardian yesterday: “The CBN is conducting liquidity ratio and capital adequacy tests to determine how strong the banks are.”

The sources disclosed that “examiners have been sent to all the banks to conduct the tests and the outcome will be made public in a matter of weeks.”

Depending on the outcome of the tests, they said the CBN could take a number of measures, including a takeover of the weak banks or a change of the management.

Although there was no official confirmation from the CBN, a source, who neither denied nor confirmed the tests, told The Guardian: “Usually such tests are done to get certain information about a bank.”

The Chief Executive, First Registrars, Mr. Bayo Olugbemi, said there would be no need for a takeover of any bank. To him, “the best the CBN could do is to intervene. This is what they did in the case of Skye Bank; they didn’t take over. They removed the former executives so that new hands can come in. No bank died and no depositor lost his funds.”

Olugbemi advised that “People should give them (CBN) the benefit of the doubt; if they say there is no problem then there is no problem. But there is still a need for them to carry out a check, to nip the issue in the bud in case there is any problem.”

The registrar added: “Liquidity ratio and capital adequacy test is a routine check and one of the responsibilities of CBN, apart from the fact that they inspect the banks on yearly basis, together with the NDIC (Nigerian Deposit Insurance Corporation). I believe what CBN is saying is that there is no bank that has liquidity issues, because they are the ones in charge.”

Also commenting, the Deputy Managing Director, Afrinvest Capital, Mr. Victor Ndukauba, noted that due to systemic exposure, “the CBN can’t just come out to say there’s an issue with one or two banks, to avoid causing panic or a run on the banks by depositors.

“CBN examinations are routine and they happen fairly often, so I wouldn’t say it is out of the ordinary. I know one of such examiners and he has a schedule that is very unpredictable. It’s a random stress check that can happen even without the examiners themselves knowing where they’re headed or when they’re headed. It’s been a common practice in the last four to five years.”

If a test shows negative, Ndukauba said that such a bank could fall back on inter-bank assistance through overnight lending on very low interest rate or fall back on its deposits with the CBN. He added that the CBN “may not be able to support the banks because chances are they may not even have the capacity to meet all those deposit obligations should they actually crystallise at once.”

According to him, what may impair a bank’s adequacy in the light of recent events in the economy is when its assets are not denominated in United States dollar but it grants loan in dollar to a borrower, which is captured in its books in naira. “There is a transmission gain in value on the basis of that loan made out. So if it has about $100 million in loans to foreign currency borrowers that it had been booking at N200 per dollar, which was the former interbank rate and therefore reflecting a N20 billion exposure, by a devaluation of say 15 or 20 per cent, automatically, the value of that loan goes up by the same margin.

“If the borrower is in a business that earns revenue in naira, there is already a dislocation of maybe 40 to 50 per cent because that business needs almost two times of the same amount in naira in order to meet up with the same obligation, where the dollar is not readily available. This can create some stress because when you’re calculating your capital adequacy ratio, your enumerator had changed and inflated by a 40 to 50 per cent factor, whereas your capital was always in naira but your denominator had expanded. That automatically lowers your capital adequacy ratio. That is one of the potential risks.”

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