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CBN defers implementation of policy on oil sector risk mitigation

By on January 13, 2015

The Central Bank of Nigeria (CBN) has 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 latest decision is 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.
The CBN stated this in a letter with reference number: “BSD/DIR/GEN/LAB/08/002,” that was addressed to all banks at the weekend.

The letter titled: “Oil and Gas Industry Credit Risk Mitigation,” was signed on behalf of the Director, Banking Supervision, Mrs. Tokunbo Martins, by K.O Balogun.

The CBN explained: “In view of the on-going implementation of the Basel II/III capital adequacy framework, the application of this regulation has been deferred till further notice.

“A new date would be advised to all banks in due course. However, the banks are required to put in place adequate risk mitigating techniques for the management of their oil and gas risk exposures which would be reviewed during our regular risk-based supervision activities. Please be guided accordingly.”

Nigerian banks are currently jostling to beef up their capital base in order to meet the requirements for the Basel II and III.

Basel ll is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It focuses on how much capital banks need to put aside to guard against operational risks.

On the other hand, the Basel III builds on the Basel I and Basel II documents, and seeks to improve the banking sector’s ability to deal with financial and economic stress, improve risk management and strengthen the banks’ transparency. A focus of Basel III is to foster greater resilience at the individual bank level in order to reduce the risk of system wide shocks.

The CBN had stated in its earlier circular dated December 10, 2014, that where exposure to the oil and gas sector (as defined by the International Standard Industrial Classification of Economic Sectors as Issued by the CBN), was in excess of 20 per cent of total credit facilities of a bank, the risk weight of the entire portfolio

in such facilities would attract a risk weight of 125 per cent for the purpose of capital adequacy computation.

In addition, banks were then directed to prepare and forward to the central bank their computation and results of their single-factor sensitivity stress test as at December 8, 2014.

The single-factor sensitivity testing is a form of stress test that usually involves an incremental change in a risk factor, holding other factors constant.

 

 

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