The Central Bank of Nigeria (CBN), yesterday, released revised guidelines on the Supervisory Review Process of Internal Capital Adequacy Assessment Process (SRP/ICAAP), which among other requirements, stipulate that deposit money banks (DMBs) “should conduct stress testing of their risk mitigation and control systems and the adequacy of their internal capital, in order to enhance the assessment of their exposure to risks.” CBN stated that although it had conducted the Supervisory Review and Evaluation Process (SREP) of banks’ Internal Capital Adequacy Assessment Process (ICAAP) since December 2013 as part of its risk-based supervisory process, the introduction of Basel III standards and its impact on capital requirements and supervisory expectations, necessitated a review of the guidance note on the Supervisory Review Process to “ensure that it reflects emerging best practice.”
It said that the Supervisory Review Process was structured along two separate but complementary stages- ICAAP and the SREP, adding that the former requires banks to “perform an independent and complete forward-looking assessment of the risks to which they are exposed and estimate the internal capital requirement that adequately reflects their risk profile, business strategy and risk acceptance level.” According to the guidelines, DMBs are expected to consider the CBN guidelines on stress testing for the country’s lenders in the development of their end-to-end stress testing process.
The guidelines further stated that banks should also consider the relevance of the CBN’s stress scenarios and “the suggested risk drivers in the context of their business and specific risk drivers.” “Banks are expected to articulate realistic management actions anticipated to reduce risk or restore capital adequacy in the event that: a) Severe and plausible adverse stress scenarios result in a Capital Adequacy Ratio (CAR) that is below the regulatory threshold; and/or b) The bank’s current capital ratio is below its internal risk appetite target,” the guidelines added.
