• Tuesday, June 25, 2024
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BusinessDay

Increase in minimum capital requirements For Nigerian banks (Part 2)

Banks’ spend on CSR more than double amid rising poverty

By Bashorun J.K. Randle

The report further explained that external resources to meet the gross financing needs of African governments are shrinking, and those available are costlier than they were prior to the COVID-19 pandemic.

Political instability and geopolitical tensions weigh on economic activity and may constrain access to food for an estimated 105 million people at risk of food insecurity due to conflict and climate shocks, it added.

Noting that African governments’ fiscal positions remain vulnerable to global economic disruptions, necessitating policy actions to build buffers to prevent or cope with future shocks, it stressed that inequality in Sub-Saharan Africa remains one of the highest in the world, second only to the Latin America and Caribbean region, as measured by the region’s average Gini coefficient.”

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What is on the table right now is what we have to contend with, namely that the last time we blazed the searchlight on the minimum capital for banks was in 2005. That was when Professor Charles Soludo was the Governor of the Central Bank of Nigeria and Chief Olusegun Obasanjo was the President and Commander-in-Chief of the Armed Forces of Nigeria. The minimum was fixed at N25 billion, which at that time was the equivalent of U.S.$18.9 million.

Incidentally, I was in the audience when President Obasanjo announced the policy change at Georgetown University, while he was on an official visit to the United States of America. That was a truly memorable occasion, as the freshmen and women clung to every word President Obasanjo had to say.

To quote William Wordsworth (1770–1850),.

“Young, eager faces with an eager pace and no less eager thoughts.”

That was almost twenty years ago, and we are now talking of N500 billion (US$359 million) for operating an international bank. It was previously N50 billion. It is the prerogative of the Central Bank of Nigeria as an institution to defend its inertia, tardiness, and delinquency in addressing such a critical and strategic component of our economic and financial infrastructure.

Before we draw any conclusions, it would serve us well to avail ourselves of archival materials—books, speeches, and seminal dissertations by Professor Charles Soludo and his successor, His Royal Highness Sanusi Lamido Sanusi (the 14th Emir of Kano), as well as the trenchant criticism of Mr. Lawson Omokhodion in his book, “Powered by Poverty.”.

Anyway, we are back at another epochal juncture in our nation’s economic and financial history.

I am not at liberty to go into details, but I was at an international conference a few days ago when a professor from Cambridge University delivered a scholarly dissertation in which he argued that the price of oil (not the U.S. dollar exchange rate) should be the reference point in adjusting the minimum capital requirement for Nigerian banks. At worst, it should be a weighted average of both critical elements—the U.S. dollar and the oil price.

It is almost one hundred pages of data, statistics, graphs, metrics, and artificial intelligence (AI) thrown in. I have yet to digest it all fully.

For now, let me give kudos to the Governor of the Central Bank for adopting a strategic approach that has earned him applause and commendations both locally and internationally. The markets are not in the mood to tolerate mediocre performance or wrong-headed policies. Reactions are always swift.

The real challenge is to consistently adopt best global practices when formulating policy, and even more so when matters advance to implementation, monitoring, and sanctions.

As an institution, the Central Bank of Nigeria is duty-bound to adopt and formally institutionalise the stress testing of banks under its supervision at regular intervals.

The “Financial Times” has earned well-deserved commendations for the following report.

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Front page headline: “FED STRESS TESTS SHOW BIG BANKS WOULD SURVIVE $541 BILLION LOSSES”

“The largest US banks would lose $541 billion in a hypothetical doomsday economic scenario but still have more than enough capital to absorb the losses, according to annual stress tests conducted by the Federal Reserve.

The passing grades given by the Fed on Wednesday to banks including JPMorgan Chase and Goldman Sachs lent support to claims from Wall Street executives and regulators that systemically important banks can withstand heavy losses.

The results will also help determine how much capital banks have to hold in the next 12 months. As long as banks match or exceed the requirements, they are free from Fed restrictions on how much capital they can put towards shareholder dividends and stock buybacks.

Analysts predicted the capital requirements of institutions such as Goldman, JPMorgan, Morgan Stanley, and Bank of America would decline due to the results. This bolstered hopes for higher dividends or more share buybacks, sending the banks’ stocks up about 1.5 percent in after-hours trading.

The results come just months after three of the largest bank failures in US history—Silicon Valley Bank, Signature Bank, and First Republic—triggered a regional banking crisis. Smaller banks that have come under pressure from investors following the collapse of SVB, including PacWest and Comerica, were not included in the stress tests.