UBA had the highest Capital Adequacy Ratio ,CAR, at 24.90%, in 2021,a metric indicating the health and safety of banks ; this was followed by Access Bank and GTCO with 24.52%, and 23.83% respectively. By these figures all the three banks outperformed the Systemically Important Bank’s ,SIB , requirements .Other banks that had CAR that outperformed the SIBs requirements were Stanbic IBTC at 21.12%, Zenith at 20.66%, Fidelity at 20.11%, and FCMB at 16.24%.
Albeit all the banks recorded CAR that was largely in compliance with the regulatory capital requirements for their respective category in 2021 except Unity bank with a negative CAR.
In terms of the composition of qualifying capital, the proportion of Tier 1 capital in the total qualifying capital of each bank-SIBs and others has also remained well above the BCBS recommendation for SIBs. On average in 2021, the proportion of Tier 1 capital in the total qualifying Capital for the Nigerian banking industry averaged about 83%, which was higher than the 75% threshold for SIBs. On an individual basis, only ETI had Tier 1 capital that was lower than the 75% threshold at 67%
The distribution of qualifying capital between Tier 1 and Tier 11 capital by the Nigerian banking industry has been outperforming the BCBS recommendation in terms of minimum CAR and the proportion of Tier 1 capital.
In terms of minimum CAR, the trend of individual CAR of banks listed on the Nigerian Exchange Limited has been a mixed bag over the last five years. Some banks have recorded growth in their CAR while others saw a slight decline. Among the banks designated as top tier banks, GTCO, UBA, and Zenith top the chart of annual CAR within the last five years (2017-2021) with CAR of between 19% to 27% while other top tier banks have CAR th at oscillates between 15.5% to 20.06% within the period. Stanbic IBTC and Fidelity led the other banking category with annual CAR of between 16% and 24.70% while Unity bank recorded negative CAR as high as -201.59% in 2019 and -86% in 2021 due to the bank’s negative shareholders’ funds
The devastating effects of the low capitalization and the financial crisis of 2008 on the banking industry left some harsh lessons for the Nigerian banking industry regulators. The crisis resulted in the loss of fortunes for the depositors, shareholders, investors, government, and the economy. This was predicated on the roles of the banking industry as a financing and payment infrastructure for the economy and a channel for transmitting monetary policy to the real economy. It thus became evident that the sustainability and safety of the economy depend on the banking industry whose health and safety also depend largely on its capital adequacy.
Capital adequacy is a situation where a financial institution’s capital level is enough to absorb its losses and asset shortfalls, i.e., having sufficient capital for current operations and future growth. The capital adequacy ratio then measures the sufficiency, soundness, and safety of the bank. It is an important metric of a bank’s risk exposure as its risk-weighted component incorporates credit risk, market risk, exchange rate risk, and interest rate risk. Essentially, the capital adequacy ratio has direct implications on banks’ riskiness and macroeconomic indexes. The ratio has direct implications for the banks’ riskiness as banks’ capital adequacy requirement is essentially a scale between capital and risk assets. Similarly, the ratio has significant implications on the deposit-asset ratio since the larger the ratio of capital to assets (or capital to deposits) the safer the customers’ deposits. The imposition of a minimum capital adequacy standard on banks strengthens the safety of deposits and the soundness of the banking system.
At the macro level, the implication of capital adequacy requirement on macroeconomic stability is also founded on the fact that the framework for achieving a stable financial system and macroeconomic environment is a regulatory policy that is preventive of instability. In cases where the system is on the verge of instability, the regulatory policy is remedial. The basic tenet of the relationship is that the banking capital adequacy requirement is a policy tool for dousing excessive activities, ensuring sustainability, and maintaining financial stability. Therefore, sentiments and subjectiveness cannot be allowed to have their way for the sake of financial stability.
Meanwhile, there is a growing trend of systemically important banks operating under a holding company structure in the country. This increasing relationship between the banking industry and the non-bank financial intermediary increases the level of systemic risks in the industry and underpins the possibility of financial disruption in the event of a weak banking system. Hence, the capital requirements of such banks must be subject to higher requirements and stricter subjective judgment by the regulator.
Calibrating banks based on their systemic importance to the financial system and applying higher minimum capital adequacy ratios thus reduce the possibility of insolvency in the financial system and promote the stability and efficiency of the system. To achieve the required capital adequacy, the regulators essentially require increasing the qualifying capital, strengthening the bank’s balance sheet, or shrinking the risk assets on the bank’s books.