Why CBN Must Conduct Regular Stress Tests on Banks, By Owhoko





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The Central Bank 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 tests 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.

“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,” he said.

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:

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.

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.

As CBN Governor, you know at the moment that some of the large, medium and small banks are not compliant with global regulatory standards on capital adequacy and liquidity, making them fall short of international best banking practices.  Indeed, how resilient are these banks to shocks induced by inherent risks like credit, liquidity, interest rates and foreign exchange?

Since global standards highlight guidelines for sound and improved quality capital and better risk cover aimed at promoting strong assets that can support periods of stress, it is essential stress tests are conducted every six months, particularly, when oil prices are heading down south with potential impact on macroeconomic stability.

Besides determination of solvency status, the need for a regular stress tests is to save the unsuspecting depositors from falling victim of likely distress in any of the banks.  Some of them exhibit cash strapped symptoms, but wear reversed look of sufficient sound health above capital-adequacy acceptable level, when indeed, all is not well, and are just within bear zone.

There are Nigerians whose life savings are deposited in these banks, yet, upon withdrawal request, some of the banks are unable to meet their demands due to insufficient funds.  This is more prevalent with domiciliary account holders.  Rather, the banks opt to cap the amount that can be withdrawn.

Mr. Emefiele sir, since non-performing loans contribute significantly to the weak state of health of these banks, it is high time CBN took specific interest in the underpinning reasons for the classification of bad debts by these banks.  The stress tests should take into consideration, the trend of debtor-companies that deliberately secure loans with the intention of not paying back.

Even without sufficient and rigorous efforts at recovery, some of these banks are quick to write-off bad loans.  Banks should no longer be allowed to freely write-off these loans without CBN’s concurrence.  However, this process should be preceded by sufficient attempts to ensure that all such loans are restructured for purposes of acquisition, failing which, before write-off.

Besides, debtor companies linked to members of board of such banks should be severely sanctioned, including replacement of management or total takeover.  Connivance by board members to create toxic loans through their proxy companies in the system is an indication of deficient corporate governance and, should not be condoned.

The CBN must be transparent and firm in its efforts at enthroning high corporate ethical standards in banks in consonant with international best practices.

Mr. Governor, for sanity and stability of the banking sector, it is my prayer therefore for you to conduct stress tests on the Nigerian banks every six months.

Once again, congratulations on your reappointment as CBN Governor.

Michael Owhoko

June 18, 2019

Michael Owhoko is a journalist, author and public relations consultant who has mostly worked in the banking, oil and gas, and media industries. He is the author of The Language of Oil and GasCareer Frustration in the WorkplaceNigeria on the Precipice: Issues, Options, and SolutionsThe Future of Nigeria; and Feminism: The Agony of Men.   He is also the publisher of Media Issues, an online newspaper that can be found at www.mediaissuesng.com.

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