CBN orders banks to conduct stress test from April

2026-03-08 - 12:37

By Babajide Komolafe The Central Bank of Nigeria (CBN) has directed banks to conduct a comprehensive stress test on their credit portfolios beginning from April 1, 2026, as part of measures to ensure the continued stability of the nation’s banking system. A source at the apex bank confirmed to Vanguard that the directive was conveyed through a letter to the Chief Executive Officers of banks, noting that the communication was not meant for public circulation. According to the source, the instruction forms part of routine regulatory oversight aimed at strengthening the resilience of the financial system. The apex bank stated that the directive aligns with the provisions of Sections 13 and 63 of the Banks and Other Financial Institutions Act 2020, which empowers the CBN to require banks to maintain capital considered adequate to cover risks arising from their operations. The CBN stated in the letter: “This is without prejudice to the contents of the CBN ‘Guideline on Stress Testing for Nigerian Banks’ issued in March 2019.” It explained that banks are required to assess the resilience of their loan portfolios over a 12-month period under simulated adverse conditions. According to the apex bank: “Banks are expected to stress the resilience of their credit portfolio over a 12-month period by simulating deterioration in asset quality, governance risk and significant change in industry dynamics such as fall in commodity prices, foreign exchange rate movement, structural shift in obligor operating market dynamics (supply chain disruption, contracting demand, etc.), portfolio variables, among others.” The CBN added that the exercise is aimed at determining the potential impact of adverse conditions on banks’ Non-Performing Loans (NPLs), loan loss provisions and Capital Adequacy Ratio (CAR). In terms of methodology, the apex bank directed banks to apply the stress test to all credit exposures, both on-balance sheet and off-balance sheet, including director and insider-related exposures, while assuming a staged migration of exposures to the next risk classification in line with prudential guidelines issued in July 2020. The CBN further explained that banks must establish a baseline for the exercise. It said: “However, where a bank’s FinA returns indicates a deterioration in specific exposures as at stress testing date, these should be adopted as the baseline amount and performance status.” The regulator also stated: “In addition to classification of credit portfolio across performing, watchlist (specialized loans), substandard, doubtful and lost, baseline position shall include exposure at default, current provisioning level, collateral value and risk weighted position.” According to the apex bank, the primary stress scenario should assume progressive deterioration of the credit portfolio within a 12-month period. It added that exposures in sectors showing signs of weakening should attract additional provisioning. The CBN stated: “Where there are signs of potential deterioration in industry dynamics, exposures shall be further stressed and deteriorated with at least an additional 10 percent provisioning applied.” On insider-related facilities, the regulator said: “Director/Insider-Related Credits: To appropriately address governance and insider-related risks, all insider-related exposures shall be treated under a severe stress assumption and assumed to be in default. These shall be fully provided for in the banks’ stress scenarios.” Following the exercise, banks are expected to disclose the impact of the stress test on their capital positions. According to the CBN: “Following the conclusion of stress testing, banks are expected to report: pre-stress CAR, post-stress CAR, and capital shortfall (if any).” The apex bank added: “It is pertinent to note that banks shall be required to raise 100% of their reported stressed capital shortfall or 50% of the shortfall computed from CBN stress analysis of the banks (whichever is higher), within an 18-month period.” The regulator further stated: “Once communicated, this level of capital shall become the risk-based capital requirement of the bank until the next cycle of stress testing, which would take place six months after the end of the capital raise to close the shortfall in stressed CAR.” For banks that record no capital shortfall, the CBN said: “For all banks without a shortfall in CAR from the stress-testing exercise, a cycle of 12-month stress testing will apply.” The apex bank directed that all lenders must submit the results of their board-approved stress-testing reports on or before the close of business on April 30.