CBN Caps Payment, Contract Suspension For Distressed Banks At 2 Days

The Central Bank of Nigeria (CBN) has capped at two business days the period within which payment obligations and contract termination rights may be suspended when it intervenes in a distressed bank, in a move aimed at ensuring orderly bank resolution while providing greater certainty for investors, creditors and other counterparties in the financial system.

The apex bank, in a circular signed by the acting director of the Financial Markets Department, Okey Umeano, provides interpretative guidance on the implementation of Sections 34(2)(b) and 40(2) of BOFIA, 2020.

According to the circular, any suspension of certain payment obligations and contract termination rights when it intervenes in a troubled bank cannot last longer than two business days, a move aimed at reducing uncertainty for banks, investors and other counterparties during bank resolution processes.

The CBN explained that the clarification became necessary because the law did not prescribe a maximum duration for such suspensions, creating uncertainty for counterparties dealing with Nigerian banks and other financial institutions.

According to the apex bank, the uncertainty had the potential to hinder effective commercial risk management. “The Central Bank of Nigeria has observed that the absence of a defined maximum duration period pursuant to the exercise of its powers under Sections 34(2)(b) and 40(2) of the Banks and Other Financial Institutions Act, 2020 has created some uncertainty for counterparties dealing with Nigerian banks and other financial institutions in respect of financial contracts,” the circular stated.

The CBN said the new guidance is intended to provide banks, financial institutions and counterparties with certainty on how it will exercise its statutory powers during bank resolution processes.

Under the new framework, the suspension of any payment or delivery obligation under an affected contract involving a failing bank, as well as the suspension of any contract termination right relating to a bank under resolution, shall not exceed two business days from the date the written order or notice is issued by the CBN Governor.

The apex bank noted that the measure is designed to strike a balance between facilitating orderly bank resolution and reducing uncertainty for investors, creditors and other counterparties, while preserving confidence in the Nigerian financial system.