CBN Moves To Stop Forex Speculation, Hoarding By Banks

The Central Bank of Nigeria (CBN) has issued a new circular on reporting foreign currency exposure to all banks to curb forex speculation and risk mitigation.

In several guidelines, the central bank seeks to address suspected cases of excessive foreign currency speculation while highlighting its concerns over the growing trend of banks holding large foreign currency positions.

“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 created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks. Therefore, to ensure that these risks are well managed and avoid losses that could pose material systemic challenges, the CBN issues the following prudential requirements,” the CBN said in a circular that was signed by its director, trade & exchange department, Hassan Mahmud, and his banking supervision colleague, Rita Ijeoma Sike.

The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” told the banks that the Net Open Position (NOP) limit of the overall foreign currency assets and liabilities, taking into cognizance both those on and off-balance sheet, should not exceed 20 percent short or 0 percent long of shareholders’ funds unimpaired by losses using the gross aggregate method.

According to the circular released on Monday, banks whose current NOP exceed 20 percent short and 0 percent long of their shareholders’ funds unimpaired by losses are required to bring them to the prudential limit by February 1, 2024.

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The banks are now required to compute their daily and monthly NOP and Foreign currency trading position using the attached templates.

The CBN directs all banks to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide an accurate reflection of their balance sheets.

“Please, note that non-compliance with the NOP limit will result in immediate sanction and/or suspension from participation in the foreign exchange market,” the apex bank warned.

Banks are also required to have an 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.

“Banks should borrow and lend in the same currency (natural 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,” the circular read in part.