Nigerian Banking Sector Regulatory Update: A Peek into the New Basel III Guidelines

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Thursday, December 02, 2021 / 12:28 PM / by Meristem Research / Header Image Credit: Ecographics


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Introduction

Basel III is the second phase of agreements reached by the Basel Committee on Banking Supervision in response to the Global Financial Crisis of 2007 - 2009. With Basel III comes increased minimum requirements for capital adequacy, liquidity, and risk coverage. According to the Bank for International Settlement, the overall aim of Basel III is to strengthen the regulation, supervision, and risk management measures of banks. Basel III is already operational in some countries, although the transition window is open till 2028. In Nigeria, implementation (initially planned for 2020), was delayed due to the outbreak of COVID-19. According to Nigeria's central bank however, the adoption of the Basel will commence in November 2021 and will run concurrently with the preexisting (Basel II) regulatory framework for a period of six months, extendable by three (3) months.

 

Capital Adequacy

Under the preexisting (Basel II) regulatory framework, Nigerian banks were required to maintain minimum total capital equal to 10% (15% for banks with international licence) of total risk-weighted assets. This has been retained under the new (Basel III) framework, however, the definition of total capital has changed. While total capital was defined as the sum of Tier 1 and Tier 2 capital, the new definition splits Tier 1 capital into Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital with required minimum ratios for each class of Tier 1 capital. Generally, the capital requirements under Basel III are more stringent. In addition to raising the minimum CET1 capital ratio from 2.50% (under Basel II) to 4.50%, Basel III requires banks to maintain AT1 capital of 2.50%. This brings the minimum required total Tier 1 capital ratio to 7.00%. AT1 capital however, need not exist. In which case, Tier 1 capital must be at least 7.50% of total risk-weighted assets for banks with national license, and 11.25% for banks with international authorization.

 

Furthermore, the new regulatory guidelines require banks to maintain two additional buffers viz. Capital Conservation Buffer (CCB1) and Countercyclical Capital Buffer(CCB2). The CCB1 (pegged at 1.00% of total risk-weighted assets) is aimed at building capital buffers during normal ('business as usual') times which could be drawn from in times of crisis. For CCB2, the purpose is to enable banks build-up capital ahead of a systemic stress period. This will be determined by CBN from time to time, but will range between 0% and 2.50% of total risk weighted assets.

 

Liquidity Requirements

Unlike the former Basel accords, Basel III contains specific requirements for liquidity in the banking system with the introduction of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The overall objective of the liquidity requirements is to ensure that banks maintain enough liquidity to meet short term funding needs.


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