- Banking Sector: CBN Governor Speaks On Strength
The Governor of Central Bank of Nigeria, Mr. Godwin Emefiele has explained that the fact that some banks failed the stress test doesn’t literally mean the country’s banking sector is weak.
The CBN Governor, while speaking at the International Monetary Fund and World Bank annual meetings, Washington DC, United States, noted that the stress test was done to check the financial health of banks.
According to a financial report published on the CBN website, seven banks failed to meet the benchmark set by the apex bank at the end of 2018.
The end-December 2018 banking industry stress test, which covered 21 commercial and 5 merchant banks, was conducted to evaluate and determine the resilience of the industry to
probable and adverse shocks, including credit, liquidity, interest rate and contagion risks.
“The fact that you read that seven banks failed stress test does not mean that those banks are weak but what we are saying is that if Bank A fails liquidity, then we tried to address it with that bank.
“So it has nothing to do with the weakness of any bank that would lead to panic or systemic crisis in the banking industry,” the apex bank Governor said.
According to him, the stress test was a strategic approach introduced by the Central Bank to assist banks that fail to meet the set benchmark and improve its capital adequacy.
“The strategic health of the Nigerian banking industry remains very strong and the Central Bank had as a matter of policy since 2015 tried to avoid being sensational about stress testing.
“Stress testing has become part of our normal routine in trying to check the health of all the banks in the industry.
“So what you will find is that from time to time, if one bank fails one ratio, we advise the bank to improve on that ratio or if its capital adequacy or liquidity or prudential ratios that we prescribe to the banking industry.
The stress test revealed that the banking industry could withstand a shock of up to 75 percent increase in the industry NPLs as the capital adequacy ratio (CAR) remained above 10 percent.
However, the industry was vulnerable to shocks above 100 percent increase in non-performing loans (NPLs) as the industry CAR fell below 10 percent.