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CBN Stress Test Reveals Banks’ Vulnerability to Economic Headwinds

CBN Stress Test Reveals Banks’ Vulnerability to Economic HeadwindsA stress test conducted on 27 financial institutions under the regulation of the Central Bank of Nigeria (CBN) has shown that even though the banking industry solvency and liquidity position are still robust, the industry may be vulnerable under the severe scenario of sustained economic contraction.

The CBN, in its half-year economic report as of June 2020, posted on its website last week, stated that it conducted top-down solvency and liquidity assessment of the banking industry in the review period.

The stress test was conducted on 22 commercial and five merchant banks to assess their resilience to systemic risks.

“The stress test was conducted within the background of a sharp fall in oil prices, reduced global demand for Nigeria’s oil products, decline in government revenue, unfavourable current account position and a fall in Gross Domestic Product (GDP).

“The result showed that under the severe scenario of a sustained significant contraction in GDP of 3.5 per cent in the third quarter of 2020, negative 4.0 per cent in the fourth quarter of 2020 and negative 4.5 per cent in the first quarter of 2021, the banking industry CAR will fall to 11.19 per cent, 9.26 per cent and 8.30 per cent, respectively.

“However, the severity of the simulated GDP contraction may be contained by a combination of fiscal and monetary interventions,” the CBN stated

The CBN, however, said one of its strategic policy thrusts over the next five years (2019-2024) was to preserve financial stability through enhancement of its on-site and off-site supervision tools and processes.

“In contributing to the achievement of this strategic objective, the CBN has finalised the draft review of its framework and Dynamic Macroeconomic, and Top-down Stress Testing Tools in the review period.

“The Framework and the models aimed at complementing the existing Early Warning System Tools and enhancing the Bank’s ability to proactively identify potential risks to the financial system as well as risks to individual banks,” it added.

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