The Central Bank of Nigeria (CBN) has issued a new set of guidelines aimed at curbing foreign exchange holding and speculation by deposit money banks.
The guidelines, titled “Harmonisation of reporting requirements on foreign currency exposures of banks,” were signed by Hassan Mahmud, Director of Trade and Exchange, and Rita Ijeoma Sike, Director of Banking Supervision, and addressed to all banks.
Expressing concern over the growth in foreign currency exposures of banks, particularly through their Net Open Position (NOP), the CBN highlighted the risks associated with holding excess long foreign currency positions. These risks, it stated, could expose banks to foreign exchange and other financial risks, potentially leading to material systemic challenges.
To address these concerns, the new guidelines outline prudential requirements for banks. The NOP, which measures the difference between a bank’s foreign currency assets and liabilities, should not exceed 20% short of 0% long of shareholders’ funds unimpaired by losses, using the Gross Aggregate Method. Banks exceeding these limits are required to bring their NOP within the prudential limit by February 1, 2024.
Additionally, banks are mandated to compute their daily and monthly NOP and Foreign Currency Trading position (FCTP) using prescribed templates. They must also maintain adequate stock of high-quality liquid foreign assets to cover their maturing foreign exchange contingency funding arrangements with other financial institutions.
The circular further emphasizes the importance of borrowing and lending in the same currency (hedging) to avoid currency mismatch risks. It stipulates that the interest rate for borrowing should match that of lending to mitigate basis risk associated with foreign borrowing interest rate risk.
Furthermore, the guidelines require banks to seek approval from the CBN for any early redemption clause in Eurobonds, even if the bond does not qualify as tier 2 capital. Banks are also directed to adopt adequate treasury and risk management systems to oversee all foreign exchange exposures and ensure accurate reporting.
The CBN warned of immediate sanctions and/or suspension from participation in the foreign exchange market for non-compliance with the NOP limits.
