Analyst’s Adaptation of the SIB Criteria
Fidelity Bank has joined Nigerian Systematically Important Banks after meeting the criteria set by the regulatory authorities . : To be continually classified as a SIB, the assessment criteria include six consecutive months of meeting the set criteria. More concisely, the CBN grants a bank that has total assets of at least 5% and minimum total credits and deposit liabilities of 6% each of the industry in the last six months to be considered a SIB. Instinctively, this provides a simplified but more observable approach for measuring SIBs.
Based on this simplified model of the CBN SIBs assessment criteria using total assets, total credits, and deposit liabilities, Proshare Analysts’ calculation shows seven banks made the list as domestic systemically important banks in Nigeria see the table below
Derived Systemically Important Banks in Nigeria
Essentially, the Nigerian banking regulator broadly classified banks based on functions/scope of operation and systemic importance to the financial system. The bank tier classification of banks is not a designation shared by the CBN but by the market operators and financial media. Notwithstanding, the Proshare Analyst calibration of Nigerian banks reveals that a systematically important bank may not be a Tier 1 bank, but a Tier 1 as understood today is most certainly a systematically important bank.
Meanwhile, the CBN also weighs and calibrates banks in terms of their risk-weighted capital requirement based on the evolution of the Basel Accords. In the regulatory requirement, SIBs are required to maintain a Higher Loss Absorbency or additional capital surcharge of 1% to their capital adequacy requirement. According to the CBN, this should however be met with the Common Equity Tier 1. The Common Equity Tier I capital as the highest weighted component of the total qualifying capital fully absorbs the losses, thereby reducing the probability of failure and ensuring the bank remains a going concern.
CBN Capital Adequacy Regulation
The general capital adequacy requirement of the Nigerian banking industry considers the relevant risk factors and the internal capital assessments of each bank to ensure that the capital held by each bank is commensurate with the bank’s overall risk profile. Yet, SIBs are subject to higher capital requirements and policy measures to reduce the probability and systemic impact of their failure.
The CBN set the domestic regulatory CAR to accommodate the different classes of banks and consistently with the international minimum standard of 10.5% under Basel III. A minimum regulatory CAR of 15% applies to all banking groups or banks with international authorization and banks categorized by the CBN as Domestic Systemically Important Banks (D-SIBs) in Nigeria. A minimum CAR of 10% applies to all other banks.
In the computation, the total qualifying capital (also called eligible capital) equals the summation of Tier 1 capital and Tier 11 capital. Tier 1 capital is the going concern capital which includes the summation of Common Equity Tier 1 and Additional Tier 1 capital, less the relevant regulatory adjustments.
On the other hand, total risk-weighted assets (TRWA) equals the sum of credit RWA, market RWA, and operational RWA. Invariably, the TRWA incorporates the risk-weighted balance sheet and off-balance sheet assets calculated based on a standardized credit risk approach and a 12.5 multiple of the market and operational risks charges (see illustration 20 below).
For ease of regulatory filing and compliance, banks are required to submit an electronic copy of their respective capital adequacy positions to the CBN using the prescribed reporting templates by the central bank and are to comply with the frequency of release on a stand-alone or consolidated basis.
The BCBS recommended that Tier 1 capital should constitute more than 50% of the total qualifying capital. More so, for banks designated as SIBs, Tier 1 capital is expected to constitute at least 75% of the qualifying capital. By implication, the Tier 11 capital of the SIBs should not be more than 25% of the total qualifying capital. For a holding company structure, the CBN requires that the minimum CAR should not be less than the CAR of any banking subsidiary within the group.
The Nigerian banking industry CAR has remained well above the BCBS recommendation of 10.5% in the last four years. The industry CAR, which was at its minimum of 10.23% in Q4 2017, grew to 15.27% in Q4 2018 and peaked at 16.11% in Q1 2021 before settling at 14.88% in Q4 2021 (see chart 47 below). The fluctuation was due largely to the increase in total risk-weighted assets arising from significant growth in credit against the slight growth performance of the qualifying capital.