CBN Now More Prudent in Assessment of Regulatory Capital of Banks, Discount Houses

Nigerian banks may have to dig deeper to come out with a robust regulatory capital requirement following the exclusion of non-distributable regulatory reserve and others in the computation of regulatory capital of banks and discount houses.
The central bank stated this in a circular with reference number: “BSD/DIR/GEN/LAB/07/021,” addressed to all banks and discount houses, a copy of which was posted on its website yesterday. The letter was signed by the Director of Banking Supervision, CBN, Tokunbo Martins.
According to the central bank, the new policy is part of ongoing reforms aimed at ensuring more prudent assessment of the regulatory capital of Nigerian banks. It also said it is line with global efforts aimed at raising the quality and loss absorbency of the capital base of banks.
Other reserves that were excluded in the computation of total qualifying capital are the the regulatory risk reserve created pursuant to Section 12.4 (a) of the Prudential Guidelines which was effective on July 1, 2010. This, it said would henceforth be excluded from regulatory capital for the purposes of capital adequacy assessment.
“Collective impairment on loans and receivables and other financial assets will henceforth not form part of tier 2 capital,” it added.
In addition, it noted that “Other Comprehensive Income (OCI) reserves will be recognised as part of tier-2 capital subject to the limits set in paragraph 3.2 of the CBN Guidance Notes on the Calculation of Regulatory Capital.
“For the avoidance of doubt, total tier-2 capital (including OCI Reserves) is limited to 33.33 per cent of total tier-1 capital. Also, banks are required to note that unaudited OCI gains will not be recognised as part of capital while unaudited OCI losses shall be deducted from the institution’s capital in arriving at total qualifying capital.
“The provisions of this circular supersede the provisions of S. 12.4 (b) of the Prudential Guidelines as well as S. 2 of our Guidance Notes on the calculation of regulatory capital.”
According to the banking sector regulator, the policy takes immediate effect.

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