Why CBN must conduct regular stress tests on banks

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By Micheal Owhoko

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 Micheal Owhoko, renowned journalist and author, 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.

– June 18, 2019 @ 13:45 GMT |

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