CENTRAL BANK OF NIGERIA REGULATORY CAPITAL MEASUREMENT AND MANAGEMENT FRAMEWORK FOR THE IMPLEMENTATION OF BASEL II/III FOR THE NIGERIAN BANKING SYSTEM

Introduction

The CBN pursuant to Section 13 of the Banks and Other Financial Institutions Act (BOFIA), 1991 as amended and in line with its core mandate of ensuring financial system stability as contained in Section 2 (d) of the Central Bank of Nigeria Act, 2007, herewith issues this Regulatory Capital Measurement and Management Framework for The Implementation Of Basel II/III for the Nigerian Banking System. The document contains guidance notes that outline the expectations of CBN with respect to the implementation of Basel II1/III by banks and banking groups in Nigeria. It specifies the approaches for quantifying the risk weighted assets for credit risk, market risk and operational risk. The computations are consistent with the requirements of Pillar I of Basel II which is expected to ensure that banks have sufficient high quality capital to support their risk taking activities and that they establish effective risk management systems commensurate with their level of operations. Banks and Banking groups are expected to adopt the basic approaches for the computation of capital requirements for credit risk, market risk and operational risk as follows:

i.	Credit Risk	Standardized Approach
ii.	Market Risk	Standardized Approach
iii.	Operational Risk	Basic Indicator Approach (BIA)

Within the first two years of the adoption of these approaches under Pillar 1, it is hoped that an effective rating system would have developed in Nigeria. Banks and banking groups are projected to have gathered more reliable data and gained experience that would prepare them to consider the adoption of more sophisticated approaches. The

																																																											 1 International	Convergence	Of	Capital	Measurements	and	Capital	Standards:	a	Revised	Framework,	issued	by	the Basel	Committee	on	Banking	Supervision,	June	2006

adoption of the Standardized Approach (TSA) for operational risks and other advanced approaches will be subject to the approval of the CBN. These Guidelines emphasize the need for banks to have comprehensive risk management policies and processes that effectively identify, measure, monitor and control their risk exposures in addition to having appropriate board and senior management oversight. The assessment of adherence to the standards and requirements set out by the CBN under the supervisory review process is key to ensuring that all risks are identified and appropriate actions are taken in a timely manner as well as ensuring that banks and banking groups have adequate internal capital management plans. A template to aid banks carry out their Internal Capital Adequacy Assessment Process is included in the relevant Guidance Note. Minimum standards for both qualitative and quantitative disclosures are given to ensure that relevant material information are disclosed by banks and banking groups for enhanced transparency and related market discipline.

While the definition of regulatory capital has not significantly changed from those contained in the 1998 Accord, a section on the definition and constituents of regulatory capital is included to provide expectation on the calculation of capital under Basel II. Although the document complies significantly with the requirements of the Basel II framework, certain sections were adjusted to reflect the peculiarities of our environment. From time to time; the CBN will also issue additional guidance notes to clarify its expectations on compliance with the technical provisions of these Guidelines. The minimum capital requirement is retained as 10 percent and 15 percent for national and internationally active banks respectively. This document is applicable to all banks and banking groups licensed to operate in Nigeria and should be applied on a solo and consolidated basis.

Areas Of National Discretion

DESCRIPTION OF THE AREAS OF	EXERCISED BY THE CBN
NATIONAL DISCRETION	(YES / NO)*
PARAGRAPH	IN
BASEL DOCUMENT 49 xiii	Employ a third tier of capital ("Tier 3":	NO
Short-term subordinated debts)	YES
54	Lower	Risk	weight	to	claims	on
sovereign	(or	central	bank)	in
domestic currency if funded in that currency
55	Recognition of Export Credit Agencies	NO
57	Claims	on	domestic	Public	Sector	YES
Entities (PSE) like banks
58	Claims	on	domestic	Public	Sector	YES
Entities (PSE) like sovereigns
60 – 64	Claims on banks	NO YES
64	Preferential treatment of claims on banking institutions with a maturity of 3 months or less
65	Allow security firms to be treated like	NO
banks	NO
67	Increase	standard	risk	weight	for
unrated claims when a higher risk weight is warranted by the default experience in their jurisdiction
68	To risk weight all corporate exposures	NO
at 100% risk weight without regard to	4

external ratings
69	Claims	(exposures)	included	in	NO
regulatory retail portfolio	NO
70	Granularity	criterion	for	the	retail
portfolio limit of 0.2% of the overall retail portfolio
71	To increase risk weights for regulatory	NO
capital exposures
72	Claims	secured	by	residential	NO
mortgages
72-73	To increase risk weight for claims	YES
secured by residential mortgages	NO
74	Commercial	real	estate	50%	risk
weight	subject	to	compliance	with
certain conditions	NO
75&78	Risk weight for the unsecured portion of a loan past due, net of specific provisions, reduced to 50% when specific provisions are more than 50%	NO
75	Past due treatment for non-past due loans to counterparties subject to 150% risk weight	NO
76	Transitional period of three years for recognition of wider range of collateral for higher risk categories (past due assets)	NO
77	If past due loan is fully secured by other forms of collateral, a 100% risk weight may apply when provisions

reach 15% of the outstanding amount
80	150% or higher risk weight to other	NO
assets
81	Risk weight gold bullion at 0%	NO NO
92	Mapping External Credit Assessment Institutions' assessments to the risk weights	NO
102	Use a borrower's domestic currency rating for exposure in foreign exchange transactions when loan extended by a Multilateral Development Agency
108	Use of unsolicited ratings	YES YES
201	Lower	risk	weight	to	claims
guaranteed	by	the	sovereign	(or
central bank) when denominated and funded in domestic currency
170	Banks can apply a H=0 for certain	YES
types of repo style transaction
171	Definition of core market participants	NO
650	Definition of gross income	NO
652	Allow	banks	to	use	Alternative	NO
Standardized Approach
654	Treatment of negative gross income	NO	6

	YES
663	Impose criteria for non-internationally active banks using standardized approach	NO
718xxii	4% Charge to be applied for specific risk of equity securities if the portfolio is both liquid and diversified
718xLii	Exemption from capital requirement	NO
for foreign exchange risk