CBN Mulls Stress-testing Banks

Owing to banks’ exposure to the oil and gas sector in the face of tumbling oil prices as well as the risk management deficiencies revealed by a recent risk-based supervision exercise conducted by the Central Bank of Nigeria (CBN), the apex regulator is broaching the idea of stress-testing banks.

Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane stated this in his latest monthly economic news and views presented at the Lagos Business School’s executive breakfast meeting.

Rewane said the bank would need the exercise “like a bullet in the head.”
He listed increased non-performing loans (NPLs) and provisioning as well as oil and gas risk assets as the likely focus is a stress test is to take place.
He stated that banks with oil and gas exposure would be the focus, adding that “higher NPLs, lower earnings and dividends.”

“CBN will most likely allow the banks ride out the storm. A bail out too expensive, Nigeria cannot afford a banking shock,” he said.

A senior official at the World Bank recently stressed the need for Nigeria and other oil producing countries whose revenue have dropped and are hit by increasing negative macroeconomic outlook, to stress-test their banking system.

This, according to the expert, would enable them determine what would happen “to your banks if, all of a sudden, foreign currency became scarce?”

Senior Director of the World Bank's Global Practice for Macroeconomics and Fiscal Management, Marcelo Giugale, who said this, argued that such an exercise would enable Nigeria and other oil producing countries to find out if there are loans concentrated “on a few construction or trading companies that could go belly up as the oil boom comes to an end.”

He indicated that oil exporters  such as Nigeria, Russia, and Venezuela, would lose a great deal as a result of the falling oil price, while oil importers - like China, India, and Japan -- will gain a bit. According to him, among oil exporters the impact of the falling oil prices would vary a lot because the countries are not all equally prepared to cope with the situation.

Not all of them used well the "good times" of $100-plus a barrel, he said.

The CBN recently postponed an earlier directive that deposit money banks should strengthen their capital buffers in order to mitigate shocks as a result of their exposure to the oil sector.

The decision, according to the central bank, was to ensure that the on-going implementation of the Basel II/III capital adequacy framework is not dislocated.

Nevertheless, the banking sector regulator urged banks to put in place adequate risk mitigating techniques for the management of their oil and gas risk exposures.