DataPro Advises Banks on Compliance with CBN Stress Test Directive

DataPro, a Nigerian technology-driven rating agency, has urged banks to commence portfolio assessments and build baseline data as the Central Bank of Nigeria (CBN) moves toward implementing a risk-based capital requirement framework.

The recommendation was made by a member of DataPro’s rating team and an Enterprise Risk Management (ERM) expert, Idris Adeleke during a recent webinar focused on the CBN’s stress testing directive.

On March 6, the CBN directed banks to conduct stress tests, an exercise designed to identify vulnerabilities arising from credit risk exposures within financial institutions. The directive is scheduled to take effect from April 1, 2026, immediately after the ongoing banking sector recapitalization exercise concludes.

Adeleke explained that the move signals the CBN’s transition to a risk-based capital regime aimed at strengthening the resilience of the financial system in support of President Bola Tinubu’s $1 trillion economy target.

He advised banks to act swiftly, noting that detailed portfolio analysis should begin immediately or as soon as the March 31 financial figures are released.

He further urged institutions to prioritize data gathering and the migration of credit exposure data to meet regulatory timelines, while ensuring effective collaboration among risk, finance, and compliance teams to deliver timely stress test results.

According to him, board-approved stress testing reports must be submitted to the CBN by the close of business on April 30, 2026.

Stress testing is used to assess a bank’s resilience by evaluating how it would perform under extreme economic conditions, such as a severe recession or market downturn.

DataPro noted that the CBN’s directive introduces stringent assumptions that will directly affect Capital Adequacy Ratios (CAR). These include a staged migration requirement, which compels banks to assume significant deterioration in asset quality across all credit exposures.

Other provisions include sectoral sensitivity, requiring an additional 10 percent provisioning floor for weakened sectors, and insider credit rules, mandating that all exposures linked to directors and insiders be classified as fully in default.

The webinar, titled “Bank Capital Stress Testing: Getting the CBN Directive Right,” brought together stakeholders across the banking sector. It provided step-by-step guidance on implementing staged migration, along with strategies for independently validating capital shortfalls in line with the CBN’s 50 to 100 percent threshold requirements.

Participants were also introduced to reference models and reporting templates aimed at ensuring seamless compliance ahead of the April 30 deadline.

Adeleke noted that the stress testing framework aligns with Sections 13 and 63 of the Banks and Other Financial Institutions Act (BOFIA) 2020, reinforcing regulatory expectations on capital adequacy.

He explained that the policy is designed to ensure banks maintain sufficient capital relative to the risks they undertake, warning that a large capital base may still be vulnerable if asset quality is deteriorating.

According to him, the CBN aims to prevent newly raised capital from being quickly eroded by existing non-performing loans, especially as both on- and off-balance-sheet exposures are considered in baseline data assessments.

He added that simulation checks will enable the regulator to determine whether the capital being raised by banks can absorb potential waves of defaults.

Adeleke further emphasized that the CBN is shifting from a fixed capital requirement model to a risk-based approach, where stress test outcomes will define each bank’s individual capital requirement until the next supervisory cycle.

While recapitalization focuses on scale and solvency, he noted that stress testing is intended to enhance stability and risk sensitivity within the financial system.

Ultimately, the risk-based capital framework will help determine the adequacy of capital buffers and whether banks require additional capital to sustain their operations, particularly in line with Nigeria’s ambition of achieving a $1 trillion economy by 2030.

He added that banks operating within such an economy must maintain strong, resilient balance sheets capable of supporting large-scale infrastructure development.