Nigeria’s “Too Big to Fail” Banks Shop for N405Bn Lifeline

Banks in Nigeria particularly the big four banks considered “too big to fail” are all in the market shopping for some N405 billion from both local and foreign sources to shore up their cash reserves.

Experts who should know also said that the banks are taking advantage of a drop in borrowing costs before the Central Bank of Nigeria (CBN)  increases how much capital they need to hold.

Banks may raise as much as N405 billion ($2.5 billion) this year compared with N342 billion ($2 billion) in 2013, according to FBN Capital, the investment-banking unit of Nigeria’s largest bank by assets FBN Holdings Plc.

Nigeria’s central bank last month changed the way lenders calculate capital buffers to align with global standards and increase their ability to withstand losses.

The CBN action is preparatory to tap into the G-20 proposal that will require top banks in the country to issue special bonds as capital that can assist them in times of crises.

In the international financial community government leaders are expected to agree in November that the world’s top banks must issue special bonds to increase the amount of capital which can be tapped in a crisis instead of calling on taxpayers to come to the rescue.

The bonds, to be known as “Gone Concern Loss Absorption capacity” or GLAC, are seen by regulators as essential to stopping the world’s biggest banks from being “too big to fail.

According to international financial sources the plans are being drafted by the Financial Stability Board, the regulatory task force of the Group of 20 economies which declined to comment ahead of a G20 summit in November, when G20 leaders will discuss the reform before it is put out to public consultation.

The reform would put in place the final major piece of G20 regulation on banking as the global body turns to a “post-crisis” agenda of fostering economic growth and bedding down the rules it has approved.

There had been unease in Asia and parts of Europe over how big the bond issues need to be to provide this cushion but there is now a new optimism amongst bankers and regulators that the G20 will reach a deal in November.

“The industry is definitely in favor of making resolution, supported by an appropriately flexible concept of GLAC, work.

That is the key pending aspect on ending too-big-to-fail,” said Andres Portilla, director of regulatory affairs at the Institute of International Finance, a Washington-based banking and insurance lobby.

The CBN ordered Nigerian banks it considered too big to fail to boost minimum capital ratios to 16 per cent last year, compared with 10.5 per cent for South African banks, which control most of the continent’s banking assets.

The central bank removed some assets banks can count as capital in preparation for the implementation of Basel II and III, while limiting Tier 2 capital to 33 per cent of Tier 1 capital, according to its August 5th circular.

Minimum capital requirements for banks with operations outside the country were kept at 15 per cent and at 10 per cent for those with interests only in Nigeria.

The changes will shave 100 to 400 basis points off the capital adequacy ratios of most banks. The central bank increased cash-reserve requirements on deposits made by government ministries and agencies and state-owned companies to 75 per cent from 50 per cent last year.

It also raised requirements on private deposits to 15 per cent from 12 per cent in March to reduce liquidity and support the naira.

The capital changes are making it “tougher for banks to generate profits to pay as dividends,” Richard Segal, head of international credit strategy at Jefferies International Ltd. in London, said in an e-mailed reply to questions.

Higher spending by government and politicians before elections in February may cause foreign outflows at the same time as banks seek to finance power, oil exploration and manufacturing projects to feed an economy forecast to expand 6 percent in 2014.