By Tony Obiechina, Abuja

The proposed recapitalisation of the deposit money banks by the Central Bank of Nigeria (CBN) is beginning to take a toll as eight of the commercial banks have fallen short of the Capital Adequacy Ratio (CAR) required for international authorisation.

In a stress test conducted by the CBN, eight of them failed.

Consequently, the affected banks have been put under pressure to raise their capital base to bridge the gap, which was brought about by the depreciation of the naira against the dollar and other foreign currencies.

Last Friday, the CBN Governor, Olayemi Cardoso said commercial banks in the country would be directed to increase their capital base, arguing that the banks currently don’t have sufficient capital relative to the finance system needs in servicing a $1trn economy.

He said, “Considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy.

“It is not just about the stability of the financial system at the moment as we have already established at the current assessment to show stability.

“However, we need to ask ourselves: will Nigerian banks have sufficient capital relative to the finance system needs in servicing a $1trn economy in the near future? In my opinion, the answer is No unless we take action.

“Therefore, we must make difficult decisions regarding capital adequacy. As a first step, the Central Bank will be directing banks to increase their capital.”

The presidency has also backed plan by CBN to increase the capital base of deposit money banks in the country.

According President Bola Tinubu, “Amidst the general lull in global economy, our ambition to attain a $1 trillion economy appears daunting. But we believe it is achievable, with God on our side and our collective determination.

“To arrive at the $1 trillion economic destination, we believe that we must address the capital adequacy of our banks that will provide the fuel for the journey.”

He said, “Considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy.

“It is not just about the stability of the financial system at the moment as we have already established at the current assessment to show stability.”

The last time CBN increased capital base for banks was in 2005 when the current Anambra State Governor, Charles Soludo was the apex bank chief. Capital base was raised from N2billion to N25billion.

The CBN through its 2021 guidelines had mandated the deposit money banks to maintain a prudential CAR of 10 percent for national and regional banks.

Those with international authorisation were instructed to uphold a 15 percent regulatory CAR.

However, the CBN report showed a decline in the banking system’s CAR, dropping to 11.2 percent, which is 3.0 percent short.

This is below the 15.0 percent threshold set for banks with international authorisation.

The decline in the banks’ CAR was attributed to a decrease in total qualifying capital relative to increased risk-weighted assets due to the naira’s depreciation following the adoption of a market-determined exchange rate policy.

This reflects the challenges faced by these institutions.

The banks were scrutinised based on their capital strength and risk profile, a crucial measure of a bank’s financial stability.

The stress test was conducted to assess the banks’ financial health and their ability to withstand adverse economic conditions and shocks.

Specifically, the test focused on the CAR, which measures the proportion of a bank’s capital to its risk-weighted assets and is used to determine the bank’s financial stability.

The CAR is a regulatory requirement set by CBN and each bank is expected to maintain a minimum level of capital to ensure their ability to absorb potential losses.

Based on the results of the stress test, it was discovered that among the affected banks with international authorisation, their capital adequacy ratio was lower than the minimum regulatory requirement set by the CBN.

This implies that these banks may have insufficient capital to meet potential losses during challenging economic conditions, which could potentially impact their overall financial stability.

The CBN’s revelation of the banks’ CAR falling below the minimum regulatory requirement emphasises the need for appropriate measures to be taken to address this issue.

It could prompt regulatory action, such as requiring the affected banks to raise additional capital or implement strategies to strengthen their financial position to mitigate any potential risks to the banking sector and the economy.

The depreciation, stemming from the CBN’s managed float of the exchange rate in June significantly impacted banks, leading to substantial foreign exchange losses.