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Risk Based Supervision: CBN to Conduct Pilot Examination of Banks

By Babajide KOMOLAFE
The Central Bank of Nigeria (CBN) is set to   conduct a pilot examination of banks under  the Risk Based Supervision even as it listed major threats to the implementation of the new system.

Acting Director, Banking Supervision, CBN, Mr. Dominique Ekeh said in Lagos, “Plans are underway to conduct a pilot risk based examination of some banks to operationalize the revised supervisory framework.”

Risk Based Supervision (RBS) was one of the 13 point reform agenda for the banking sector announced in 2004 by the former CBN Governor, Professor Chukwuma Soludo. In November 2005, the CBN as a first step to commence RBS released the Framework for Risk-Based Supervision of Banks in Nigeria. The apex bank also directed banks to develop and submit their risk based management framework.

Ekeh however said that the apex bank had revised supervisory framework and the set of supervisory guides for the RBS Framework has been revised which would be tested via a pilot risk based examination of selected banks.

Addressing the annual general meeting of the Risk Managers Association of Nigeria (RIMAN), he lamented that despite the efforts of the CBN, the implementation of RBS in Nigeria is been threatened by a number of challenges and the need to address them cannot be over-emphasized. These challenges, he said include dearth of risk management skills and competence, data integrity and transparency issues, and reliance on the work of others.

He said, “There is currently an acute dearth of knowledge and skill in risk management in Nigeria, and this presents a major challenge as banking operation and supervision becomes more risk focused. It is expected that through fora such as this and other capacity building initiatives by RIMAN, CIBN and other key stakeholders, the identified skill and knowledge gaps among industry practitioners and regulators would be significantly bridged, going forward. We are aware, for instance, that the CIBN is in the process of introducing a certificate course in risk management. As risk experts, we are confident that RIMAN too would contribute in advancing the frontiers of risk management education in Nigeria.”

“Stress testing is the process of defining potential extreme adverse future economic scenarios, measuring the sensitivity of the bank’s credit, market, investment and operational risk portfolios to changes in economic variables resulting from such extreme scenarios and quantifying the overall negative impact on planned profitability, capital levels, liquidity position, etc.

An effective stress testing framework involves the implementation of risk reduction strategies, policy changes, etc. should the results of the stress test exceed the risk appetite approved by the board.

During the current global financial crisis, many international banks ran into trouble because they did not perform effective stress testing of their loan and investment portfolios. Had Nigerian banks, and indeed many international banks, been applying stress testing as an integrated feature of their risk management frameworks in the past, value destroying practices such as excessive margin lending would have been averted and the industry would have been in a better position to fund much needed economic growth”

“Experience has shown that poor data integrity and lack of transparency have been the bane of the Nigerian banking system. Some banks engage in sharp and unorthodox practices to achieve compliance with some regulatory requirements.

In some instances, banks’ returns provide inaccurate/misleading financial report thereby preventing timely detection of emerging problems by the regulatory authorities. Despite repeated penalties and other regulatory sanctions imposed on the errant banks, the problem has continued unabated. The quality of disclosure has been seriously undermined by the lack of transparency to the extent that off-site analysis could not provide reliable diagnosis of emerging problem thus necessitating more frequent on-site visits or examination.

The efficacy of Risk Based Supervision relies heavily on the integrity of data upon which informed and accurate analysis for assessment of risk may be conducted.  Where information and data is false or unreliable, assessment from analysis conducted on such data would also be unreliable and faulty.  The deployment of the Electronic Financial Analysis and Surveillance System (eFASS) and the zero tolerance policy of the CBN with respect to false rendition of returns and misreporting by banks are part of measures already taken by the to deal with these issues of supervisory concern.”

“Reliance on the work of others is a key attribute of risk based supervision. The RBS framework contemplates the use, where appropriate, of an institution’s internal risk management control functions. It also contemplates reliance on an institution’s external auditors for fairness of financial statements and their work will be used to modify the scope of reviews to minimize duplication of effort.

While it is logical to avoid duplication of effort by relying on the work of others, this however, presents a challenge, in view of the potential moral hazard of placing such reliance. Consequently, circumspection and sound judgment should be the guiding principles in this regard.”


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