At the tail end of last year, the CBN successfully implemented the third set of Basel Accord requirements, known as Basel III, in order to promote a stable financial system.
The new framework is expected to improve bank capital levels and quality while also improving their liquidity situation.
Despite the fact that the new framework has been in place since November 2021, the CBN stated that it will run concurrently with the Basel II framework for an initial term of six (6) months, with the possibility of an extension of three (3) months if industry performance is satisfactory.
Basel III made various adjustments to the previous Basel II framework, such as introducing a non-risk-based Leverage Ratio (LeR);
Banks are now expected to keep a minimum LeR of 4% at all times, according to the CBN’s Basel III requirements, with banks designated as Domestic Systematic Important Banks (DSIB) required to retain an additional 1% buffer over the minimum rate of 4%. (i.e. 5%).
The breakdown of total capital has evolved as a result of the apex bank’s Basel III criteria, which further divide Tier 1 Capital into Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) Capital, with minimum ratios of 10.5% and 0.75%, respectively.This is in contrast to Basel II, which merely divided capital into Tier 1 and Tier 2.
In addition, the new standard adds the Liquidity Coverage Ratio (LCR) to the existing bank performance ratios. The LCR will require banks to keep a sufficient amount of high-liquid assets to withstand a stipulated time of stressed funding.
DMBs must have a minimum capital requirement of 15%, whereas DSIB banks must maintain an additional 1% capital requirement (16 percent ). Basel III will require an additional 1% capital buffer for the Capital Conservation Buffer (CCB1), boosting the overall minimum capital requirement for banks to 16% and DSIBs to 17%.
The revised guidelines also included a Countercyclical Capital Buffer (CCB2), which was established at 0-2.5%and will be modified by the CBN on an ongoing basis. The CBN has set the CCB2 at 0% at the moment.
In general, Basel III capital requirements are stricter to prevent banks from taking unnecessary risks that could harm the financial system.
The new framework aims to improve the global financial sector’s stability by strengthening banks’ capital and liquidity balances.
However, there are concerns that the new policy will have a negative impact on these banks’ dividend payouts because they will need to hold more liquid assets. However, regulators have stated that the goals of a healthy financial system with strong capital positions and leverage are in the best interests of all banking stakeholders, and thus outweigh the immediate dividend reduction.