The Central Bank of Nigeria (CBN), on Wednesday issued a new set of guidelines which aims to among others, stop deposit money banks from foreign exchange holding (speculation).
The guidelines, titled “Harmonisation of reporting requirements on foreign currency exposures of banks,” was signed by Hassan Mahmud, Director, Trade and Exchange and Rita Ijeoma Sike, for director, banking supervision, and addressed to all banks.
The CBN expressed concern over the growth in foreign currency exposures of banks through their Net Open Position (NOP), a development that has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.
It said the new guidelines would ensure that these risks are well managed and avoid losses that could pose material systemic challenges.
The prudential requirements, as listed in the circular, are that: “the Net Open Position (NOP) of the overall foreign currency assets and liabilities taking into cognizance both those on and off-balance sheet should not exceed 20% short of 0% long of shareholders funds unimpaired by losses using the Gross Aggregate Method and that banks whose NOP exceeds 20% short and 0% long of their shareholders’ funds unimpaired by losses are required to bring them to prudential limit by February 1, 2024.”
The CBN further stated that banks are required to compute their daily and monthly NOP and Foreign Currency Trading position (FCTP) using attached templates and 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 exchange contingency funding arrangement with other financial institutions.
The NOP measures the difference between a bank’s foreign currency assets, that is what it owns in foreign currencies and its foreign currency liabilities or what it owes in foreign currencies.
The circular further mandates banks to borrow and lend in the same currency (hedging) to avoid currency mismatch associated with foreign currency risk, the basis of the interest rate for borrowing should be the same as that of lending i.e there should be no mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.
“With respect to Eurobonds, any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier 2 capital; all banks are required to adopt adequate treasury and risk management systems to provide oversight of all foreign exchange exposures and ensure accurate reporting on a timely basis; and banks are expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide a (sic) accurate reflection of their balance sheets,” it added.
The CBN warned that non-compliance with the NOP will result in immediate sanction and/or suspension from participation in the foreign exchange market.