Naira depreciation: CBN sets new foreign currency exposure limit for commercial banks
…Accuse banks of hoarding FX to increase profits
By Sodiq Adelakun
In response to the ongoing depreciation of the Naira, the Central Bank of Nigeria (CBN) has taken a decisive step to stem the tide of currency speculation and hoarding by commercial banks.
On Wednesday, the CBN released a circular entitled ‘Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,’ which was co-signed by Hassan Mahmud and Rita Sike, Directors of Trade and Banking Supervision.
The circular highlights the CBN’s concerns regarding the practices of some commercial banks that have been hoarding foreign currency. These institutions have been accused of stockpiling foreign exchange to capitalise on profits from the Naira’s fall in the forex market.
This behaviour exacerbates the currency’s volatility and contributes to the economic challenges facing the country.
The newly issued guidelines are part of a broader strategy by the CBN to bring stability to the foreign exchange market and to ensure that banks operate within a framework that promotes transparency and accountability.
The guidelines are expected to take immediate effect, with commercial banks required to comply with the new reporting standards set forth by the CBN.
It noted the guideline is necessary concerning the growth in foreign currency exposures of banks through their Net Open Position, NOP.
“The Central Bank of Nigeria (CBN) has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has incentivized banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.
“Therefore, the CBN issues the following prudential requirements to ensure these risks are well managed and avoid losses that could pose material systemic challenges.
“For example, a bank borrows or buys $1 million worth of forex but then holds half of it in its position instead of lending it or using it to finance purchases for its clients immediately.
“What this means is that banks can profit from currency depreciation if they buy the forex low and sell high,” it stated.
Also, the CBN added that “banks with current NOPs exceeding these limits must adjust their positions to comply with the new regulations by February 1, 2024.
“Additionally, banks must calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided by the CBN.”
It was gathered that the Naira woes worsened on Tuesday, crashing 42 percent against the US dollar in the foreign exchange market in the last two days.
…CBN sets new foreign currency exposure limits for banks
Meanwhile, the Central Bank of Nigeria (CBN) has introduced stringent measures to regulate banks’ foreign currency exposure.
The apex bank issued a circular on Wednesday mandating that the Net Open Position (NOP) of banks should not exceed 20 percent short or 0 percent long of the shareholders’ funds unimpaired by losses.
The directive, encapsulated in a circular titled ‘Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,’ requires banks to maintain their overall foreign currency assets and liabilities, including both on and off-balance sheet items, within the stipulated limits.
The circular was jointly signed by Hassan Mahmud, Director of the Trade and Exchange Department, and Rita Ijeoma Sike, representing the Banking Supervision Department of the CBN.
The CBN’s move is designed to mitigate the risks that arise from excessive foreign currency exposure, which can lead to significant financial instability in the event of currency fluctuations. By ensuring that banks do not hold more foreign currency assets than their shareholders’ funds unimpaired by losses, the CBN is looking to foster a more robust and resilient banking system.
Banks that currently exceed these prescribed NOP limits have been given a deadline until February 1, 2024, to adjust their positions in accordance with the new regulations.
This development is expected to prompt a reevaluation of foreign currency holdings by Nigerian banks and could lead to a more conservative approach in managing foreign exchange risks.The NOP is a critical measure of a bank’s currency position risk, representing the difference between its foreign currency assets and liabilities.
The CBN’s latest regulation underscores its commitment to maintaining a stable financial environment in Nigeria’s dynamic economic landscape.
Regulatory bodies often impose NOP limits on banks to prevent excessive exposure to foreign currency fluctuations and potential financial instability.
These measures aim to enhance risk management within the banking sector, fostering stability and safeguarding against potential vulnerabilities associated with excessive foreign currency exposure.
In addition to the NOP limits, banks are required to diligently calculate their daily and monthly NOP, along with their Foreign Currency Trading Position (FCT), using specific templates provided by the Central Bank. This meticulous approach aims to enhance transparency in reporting and ensure that banks adhere to the regulatory framework.
These measures underscore the Central Bank’s commitment to fortifying the financial system against potential vulnerabilities, promoting responsible risk management practices within the banking sector.
Banks are urged to promptly adhere to these directives to maintain regulatory compliance and uphold the integrity of the financial system.
According to the circular, banks are also required to have adequate stock of high-quality liquid foreign assets, i.e. cash and government securities in each significant currency to cover their maturing foreign currency obligations. In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions.
The CBN emphasised the importance of strategic financial practices for banks to mitigate foreign currency risks effectively. The key recommendations include borrowing and lending in the same currency, known as natural hedging, to avoid potential mismatches associated with foreign currency exposure.
The circular underscored that the interest rate basis for borrowing should align with that of lending, stressing the importance of eliminating discrepancies in floating and fixed interest rates. This approach aims to mitigate basis risk linked to foreign borrowing interest rate fluctuations, fostering stability in financial operations.
The circular highlighted specific guidelines regarding Eurobonds. It stated that any clause related to early redemption should be initiated by the issuer, and approval must be sought from the CBN. This holds true even if the bond does not qualify as tier 2 capital.
