CBN set to implement Basel Accord regulations
The Central Bank of Nigeria (CBN) on Thursday issued guidelines for the implementation of both Basel 2 and 3 in the country which are a set of agreements that provide recommendations on banking regulations in regards to capital risk, market risk and operational risk accepted globally.
According to the CBN, banks are expected to commence a parallel run of both Basel 1and 2 minimum capital adequacy computation based on the requirement of the guidelines with effect from January 2014. It also stated that minimum capital adequacy computation under Basel 2 rules would commence in June 2014.
The CBN stated this in a circular on the implementation of Basel 2 and 3 in Nigeria, dated December 10, 2013, a copy of which was posted on its website. The circular with reference number: 'BSD/DIR/CIR/GEN/LAB/06/053,' was addressed to all banks and discount houses. It declared that all banks were expected to adopt basic approaches for the computation of capital requirements for credit risk, market risk and operational risk.
Specifically, on credit risk, it recommended that the standardised approach should be adopted, ” adding that all forms of corporate claims would be treated as unrated. In the same vein, on market risk, the central bank directed that the standardised approach should be adopted, just as on operational risk, it recommended that the Basic Indicator Approach (BIA) should be adopted. It explained: 'Within the first two years of the adoption of these approaches under Pillar 1; it is hoped that an effective rating system would have developed in Nigeria.
'Banks and banking groups are projected to have gathered more reliable data and gained more experience that would prepare them to consider the adoption of more sophisticated approaches. 'The adoption of the Standardised Approach for Operational Risk and other sophisticated approaches will however be subject to the approval of the CBN.' It also stated that the guidance notes would be applicable to all banks and banking groups licenced to operate in Nigeria on both a solo as well as consolidated basis. The minimum capital requirement was however retained at 10 per cent and 15 per cent respectively for local and internationally active banks.
'They specify approaches for quantifying the risk weighted assets for credit risk, market risk and operational risk for the purpose of determining regulatory capital. The computations are consistent with the requirements of Pillar 1 and Basel Accord (International Convergence of Capital Measurement and Capital Standards). It added: 'Although the guidelines comply significantly with the requirements of Basel 2/3 accord, certain sections were adjusted to reflect peculiarities of our environment. From time to time, the CBN will issue capital implementation notes to clarify its expectations on compliance with the technical provision of the regulation.
'In line with Basel 2 Pillar 2, banks are reminded of the importance of comprehensive risk management policies and processes that effectively identify, measure, monitor and control their risk exposures in addition to having appropriate board and senior management oversight.' Continuing, the central bank noted: 'Henceforth, banks are required to carry out their Internal Capital Adequacy Process (ICAAP) on annual basis, as at December 31, and forward copies of the report to the CBN for review not later than four months to the end of the year. 'For the avoidance of doubt, the deadline for the submission of the ICAAP for the 2013 financial year is April 30, 2014.'