Finance

Why CBN must conduct regular stress tests on banks, by Michael Owhoko

Why CBN must conduct regular stress tests on banks, by Michael Owhoko

The Central Bank of Nigeria Governor, Godwin Emefiele, has been advised to conduct stress tests on the Nigerian banks more regularly to determine the true health status and capital adequacy of these banks to withstand potential adverse effects and challenges in a dynamic and vulnerable economy like Nigeria aimed at protecting depositors’ funds and other investors’ interests.
This advice was contained in an open letter written to the CBN Governor by renowned journalist and author, Michael Owhoko, who stressed that the test should be conducted every six months in order to compel the banks to comply with global regulatory standards on capital adequacy and liquidity.
This, he said, will not only prove the resilience of the banks to shocks induced by inherent risks, but will also instill confidence in the banking public, reassure foreign interests and their partners that the Nigerian banking industry is safe for business.
Specifically, Owhoko emphasized the need for a sound and improved quality capital and better risk cover for the banks in order to achieve capacity to withstand shock, particularly during period of fluctuating crude oil prices to which the nation depends largely for foreign exchange.
The author said further that he knows that the CBN conducts stress tests on the banks, but the frequency does not allow the institution to get the true picture of financial strength of these banks.
According to him, conducting stress tests on the banks every two or three years is not enough as scenarios change almost after each test due to sliding performance of the economy, making him to suggest that stress tests be conducted bi-annually.
He said: “As you know, the Nigerian banks are not immune to the vulnerability of the mono commodity nature of the Nigerian economy and high-tide financial environment. That is why I am recommending that stress tests be conducted on a bi-annual basis on the Nigerian banks because of their current feeble substructure and weak capital base. This will put the banks on their toes. Remember, it is the duty of the CBN to identify areas that are vulnerable to risk and protect depositors’ funds.”
Owhoko added that the essence of the regular stress tests is to save the unsuspecting depositors from falling victim of likely distress in any of the banks and that since non-performing loans contribute significantly to the weak state of health of these banks, CBN should fish out for sanction debtor-companies that deliberately secure loans with the intention of not paying back.
Below is the full text of the letter:

An Open Letter to CBN Governor, Godwin Emefiele, over health of Nigerian banks

Dear Mr. Godwin Emefiele

I congratulate you on your re-appointment as Governor of the Central Bank of Nigeria (CBN) for a second term. This appointment, I believe, is divinely orchestrated to ensure consistency in economic policies and, to afford you the opportunity to improve on the economy, particularly, the misery index, among others, which currently, do not inspire hope in the country.

However, the purpose of this letter is not the misery index, even though current levels of inflation and unemployment are at feverish level, the essence of my letter is for you to be conducting stress tests on the Nigerian banks bi-annually. This is informed by concerns on the current state of health of the banks, which is causing apprehension among Nigerian depositors over safety of their investments.

My dear Governor, I know you conduct stress tests on the banks, but the frequency does not allow you to get the true picture of financial strength of these banks. Conducting stress tests on the banks every two or three years is not enough, as scenarios change almost after each test due to sliding performance of the economy. Therefore, in my view, stress tests should be done bi-annually.

I am also worried about CBN’s restricted target during stress test which technically focuses more on effective risk capacity and global benchmark compliance of banks without considering and envisaging concerns on the overall health of the Nigerian banks.

Since stress tests determine capital adequacy and capacity of quality of assets of a bank to withstand potential adverse effects and challenges in a dynamic and vulnerable economy like ours, regular disclosure of state of health of these banks are imperative. This will not only instill confidence in the banking public, it will also reassure foreign interests, their partners and other potential investors that all is well with the Nigerian banking industry and, is safe for business.

UBA wise savers
Imagine if the recent acquisition of Diamond Bank by Access Bank had not occurred, and Diamond Bank was allowed to go under, a lot of depositors would have lost their investments. I knew long before the distress symptoms began to manifest, which prompted me to quickly approach Diamond Bank to close my account, without also disclosing to anybody, to avoid a run on the bank.

As you know, the Nigerian banks are not immune to the vulnerability of the mono commodity nature of the Nigerian economy and high-tide financial environment. That is why I am recommending that stress tests be conducted on a bi-annual basis on the Nigerian banks because of their current feeble substructure and weak capital base. This will put the banks on their toes. Remember, it is the duty of the CBN to identify areas of vulnerability to risk and protect depositors’ funds.

The role of the internal and external auditors of these banks is unhelpful as some of them conspire with their principals and operators to present a contrived healthy balance sheet. The CBN examiners or inspectors may be aware of these unethical practices and cover-up, yet, opt to collaborate to give them soft landing without appropriate penalties.

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