CBN’s new capital rule to expose hidden risks in banks

Nigeria’s banking sector is entering a critical phase of regulatory scrutiny as the Central Bank of Nigeria (CBN) rolls out a stringent stress testing regime that could expose hidden weaknesses in lenders’ balance sheets, particularly in legacy bad loans and insider-related credits.

The directive, issued by the CBN on March 6, mandates banks to conduct comprehensive stress tests aimed at identifying vulnerabilities arising from credit risk exposures. The policy is expected to take effect from April 1, 2026, immediately after the conclusion of the ongoing banking sector recapitalisation exercise.

DataPro, a Nigerian technology-driven rating agency, says the move signals a decisive shift from traditional capital adequacy benchmarks to a more risk-sensitive framework that prioritises asset quality over mere capital size.

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Idris Adeleke, a member of the firm’s rating team and an Enterprise Risk Management (ERM) expert, issued the advisory on behalf of DataPro during a recent webinar on the CBN’s stress testing directive.

“A large capital base alone can be fragile if underlying assets are actually deteriorating,” Adeleke said. “The CBN’s goal is to ensure that new capital being raised is not immediately eroded by existing bad loans.”

At the heart of the new framework is a set of severe assumptions that could significantly impact banks’ Capital Adequacy Ratios (CAR). One of the most critical is the “staged migration” requirement, which compels banks to assume a sharp deterioration in credit quality across all exposures, effectively reclassifying a portion of performing loans as impaired under stress conditions.

In addition, lenders are required to apply a minimum 10 percent provisioning floor to sectors considered vulnerable, while all insider and director-related exposures must be treated as fully defaulted during the simulation.

These measures, DataPro says, could bring long-standing but underreported credit risks to the surface.

“There are a lot of brought-in dead loans sitting on balance sheets,” Adeleke noted, adding that the directive explicitly requires banks to consider both on- and off-balance sheet exposures when compiling baseline data.

The implication is that some banks—particularly those with concentrated exposures in volatile sectors or weak credit monitoring frameworks—may see a sharp deterioration in their capital buffers once the stress tests are applied.

The stress testing exercise is designed to evaluate how banks would withstand extreme economic shocks, including severe recessions or market disruptions. According to the CBN, the results will not only reveal vulnerabilities but also determine each bank’s effective capital requirement for the current supervisory cycle.

“This is a transition from fixed capital requirements to risk-based capital requirements,” Adeleke explained. “The stress test result will effectively become each bank’s individual capital benchmark until the next supervisory cycle.”

Banks are expected to submit board-approved stress testing reports to the apex bank by April 30, 2026, leaving a narrow window for compliance.
To meet the deadline, experts have advised lenders to urgently commence detailed portfolio reviews and baseline data gathering, particularly as full-year financial numbers as of March 31 become available.

“Prioritise data gathering and migration of credit exposures, and ensure strong collaboration across risk, finance, and compliance teams,” Adeleke said.

The broader policy direction aligns with the provisions of the Banks and Other Financial Institutions Act (BOFIA) 2020, which empowers the regulator to enforce prudential measures that safeguard the stability of the financial system.

While the ongoing recapitalisation exercise has largely focused on boosting the size and solvency of banks, the stress testing directive shifts attention to the sustainability of that capital under adverse conditions.

DataPro noted that this dual approach, recapitalisation combined with risk-based capital assessment, could reshape lending behaviour across the industry, forcing banks to adopt more disciplined credit risk management practices.

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“The outcome of this exercise will determine whether banks have sufficient buffers to absorb potential waves of default,” Adeleke said. “It will also show if additional capital is required to continue their operations safely.”

The stakes are particularly high given Nigeria’s ambition to build a $1 trillion economy by 2030, a goal that will require a resilient and well-capitalised banking system capable of financing large-scale infrastructure and private sector growth.

“With that level of ambition, banks must have bulletproof balance sheets,” Adeleke added.