After Recapitalisation, Banks Face Stress Test to Strengthen Risk Management, Financial System Stability 

Nume Ekeghe

 Following the successful conclusion of the banking sector recapitalisation exercise, the Central Bank of Nigeria (CBN) is set to focus on the next phase of regulatory oversight, unveiling a strengthened risk management regime anchored on stress testing and stricter capital discipline.

 Announcing the completion of the recapitalisation programme, the CBN stated that the new framework was designed to consolidate gains recorded and ensure that banks remain resilient in the face of potential macroeconomic and sector-specific shocks.

To this end, the Director of Banking Sector Supervision at the CBN, Dr. Olubukola Akinwunmi, who disclosed this during an interview on ARISE NEWS Channel, said the apex bank has reinforced its risk-based capital adequacy framework, mandating deposit money banks to conduct periodic stress tests under defined scenarios, while maintaining sufficient capital buffers to absorb potential losses.

He explained: “To safeguard these gains, the CBN has strengthened its risk-based capital adequacy framework, requiring banks to conduct regular stress testing across defined scenarios and maintain appropriate capital buffers.

“Key regulatory measures, including prudential guidelines and the supervisory framework, are subject to periodic review to support ongoing strengthening of governance, risk management, and sector resilience.”

Speaking further, Akinwunmi said: “We don’t have to wait for another 20 years or 30 years before we ensure that our banks are adequately capitalised.

“Now, the stress testing framework requires that banks create scenarios that could happen where there is a deterioration in their loan books. So, if there is any shock, domestic or external, that affects the economic agents that they are lending to households, consumers, businesses and it happens to impact their ability to repay, that means the bank may be exposed to taking some losses.

 “What the risk-based capital requirement, founded upon the stress testing framework, says is that, on an ongoing basis, banks will assess their exposure to risk based on a gradual deterioration of their loan book.

“And that gradual deterioration of the loan book is a scenario-based deterioration to determine the gap that may be there for banks to proactively respond by raising additional capital, or perhaps proper planning of their loan books to ensure that the capital they have is properly managed to meet the demands of their risk exposure.

“The essence of the stress testing framework, and the intent is to ensure that banks proactively manage the capital required, their capital adequacy, and meet it when necessary, raise adequate fresh capital that is required to maintain capital adequacy.”

Reacting to the move by the central bank, analysts said it signals a transition from capital raising to capital preservation and efficient deployment, adding that the regulators seek to avoid a repeat of past episodes of asset quality deterioration and weak risk controls.

An analyst who spoke with THISDAY on condition of anonymity, disclosed that a critical component of the stress testing was a directive requiring banks to make 100 per cent provision for insider-related loans whether performing or non-performing, alongside modelling a range of adverse scenarios.

According to the analyst, the measure was intended to curb potential abuses and enforce stronger discipline in credit allocation, particularly in related-party transactions that have historically posed governance risks within the banking system.

Speaking with THISDAY, the Head of Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi, said most banks were already nearing completion of their stress test submissions.

“I think almost a lot of banks are almost done with their report. I think the reports should be submitted to the CBN this week. It is meant to be like is a proactive risk management framework in which they are looking at all the various sectors, stressing them, and looking at the worst case, looking at different scenarios,” he disclosed.

He added: “Assuming that there is a 20 per cent decline in your profits, there is also an increase in your NPL, right? Just looking at the worst-case scenario. And I think some major feature of it also is that the banks are now meant to make 100 per cent provision for insider-related loans whether performing or non-performing. The essence of that one is to try and prevent abuse, in which they’re just giving themselves loans, and to ensure that the banks are also proactive in managing their loan book.”

Olubunmi noted that the completion of the capital raising does not eliminate the need for future capital injections, particularly as scale becomes increasingly critical in the evolving financial landscape.

“I believe that in the next one or two years, we’ll see more banks coming into the market, because we are going to see that scale matters a lot.

“You can’t expect a bank with over N2.5 trillion in capital and somebody with N100 billion in capital to be competing in the same market. And we’re going to see a lot of banks also come into the market, particularly the national, the regional banks, and the non-interest banks, for them to raise and shore up their capital base.

 “But having said that, now the focus of most banks is no longer how to raise capital. The question now is how they can deploy it effectively to be able to generate enough returns,” he added.

He said further: “After this round of capital raise, I anticipate we will see more new sectors, some that people don’t even focus on now, that banks will begin to support significantly.”

 Also, a member of DataPro’s rating team, Idris Adeleke, said the post-recapitalisation stress testing directive signals a shift toward risk-based capital regulation, aimed at ensuring banks’ balance sheets are resilient enough to withstand shocks and support Nigeria’s $1 trillion economy ambition.

He added: “The CBN goal is to ensure that the new capital you are raising is not swallowed up immediately by existing bad loans. So, the stress test result shall become the Bank’s official individual capital requirement until the next supervisory cycle. The outcome of this risk-based capital charge is to determine the buffer and see whether you need additional capital to do your business.”