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Banks begin implementation of Basel III in November – CBN

Nigerian lenders tighten credit criteria as default rates worsened in Q4’20

The Central Bank of Nigeria (CBN) has set November 2021 as the effective date for banks to commence the implementation of Basel III guidelines.

This is in fulfilment of its announcement a year ago (September 11, 2020) that it would commence a phased implementation of Basel III standards and revise the existing Basel II guidelines on Regulatory Capital and Supervisory Review Process in 2020/2021 fiscal years.

In a letter to all banks dated September 2, 2021, the CBN said the implementation of the guidelines will commence with a parallel run effective November 2021 for an initial period of six months, which may be extended by another three months, subject to milestones achieved in the supervisory expectations.

Africa’s biggest economy’s banking sector regulator said it had completed the development of guidelines for Basel III implementation by banks in 2020. However, due to the outbreak of the COVID-19 pandemic, the implementation was suspended to minimise the regulatory compliance burden on the banks.

The letter signed by Haruna Mustafa, director banking supervision, stated that all banks are to submit monthly returns not later than five working days after the end of the preceding month, with effect from November 2021.

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During the parallel run, the Basel III guidelines shall operate concurrently alongside the existing Basel II guidelines, also subject to the successful conclusion of the parallel run, the Basel Ill guidelines shall become fully effective, the letter said.

“Finally, all banks are to note that capital add-on will be introduced in a phased manner as part of the overall supervisory process of Pillar II assessment to enhance better risk management practices and better align their capital with their risk profiles,” the letter reads.

This is to reduce the risk of a build-up of excessive leverage in the banking system and provide a safeguard against excessive concentration.

Basel III standard is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk.

The standard is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

The apex bank has also issued guidelines to cover the following standards, amongst others: Liquidity Coverage Ratio (LCR), Liquidity Risk Management (LRM) and Internal Liquidity Adequacy Assessment Process (ILAAP), Large Exposures and Regulatory Capital definition.

“In addition, the revised guidelines on the Supervisory Review Process of internal Capital Adequacy Assessment Process (SRP/ICAAP) are also issued herewith for adoption by banks,” the CBN said.

The CBN said the objective of these guidelines is to define the minimum requirements for Liquidity Coverage Ratio (LCR) for reporting entities operating in the Nigerian banking industry. The LCR aims to promote short-term resilience of the liquidity risk profile of reporting entities by ensuring that they have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately into cash in private markets to survive a significant stress scenario lasting 30 calendar days.

Liquidity risk is the risk that a reporting entity may not be able to meet its obligations as they fall due without incurring unacceptable losses. This could be as a result of the inability of the entity to liquidate sufficient assets in a timely fashion or to obtain funding to meet its liquidity needs due to institution-specific reasons or market-wide stress.