CBN report shows banks are at risk during economic contraction

06 Nov CBN report shows banks are at risk during economic contraction

The  half-year economic report of the Central Bank of Nigeria (CBN) shows that the industry may be vulnerable under the severe scenario of sustained economic contraction

It says a stress test was conducted on 22 commercial and five merchant banks to assess their resilience to systemic risks revealed 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 report states that, “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, 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.