THE Central Bank of Nigeria (CBN) has expressed concerns over banks’ growth in foreign currency position.
It said the position exposed the banks to foreign exchange (FX) and other risks.
The CBN disclosed this in a circular on Wednesday, January 31, stating that banks’ growth in foreign currency exposures comes 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 created an incentive for the banks to hold excess long foreign currency positions, which exposes the banks to foreign exchange and other risks,” the CBN said.
An NOP is the aggregated sum of the net short or long positions across any particular foreign currency or all foreign currencies for banks; a long position indicates a net foreign currency asset position, while a short position indicates a net foreign currency liability position reports The ICIR.
In the circular, CBN recommended new prudential requirements for the banks to comply with to ensure banks manage the risks and avoid losses that could pose systemic challenges.
It said the NOP limits of the overall foreign currency assets and liabilities, taking into cognisance both those on and off-balance sheet, should not exceed 20 per cent short or zero per cent long of shareholders’ funds unimpaired by losses using the gross aggregate method.
Banks whose current NOP exceeds 20 per cent short and zero per cent long of their shareholders’ funds unimpaired by losses must bring them to the prudential limit by February 1, 2024.
The apex bank also directed the banks to compute their daily and monthly NOP and foreign currency trading position (FCTP) using approved templates.
It urged the banks to have adequate stock of high-quality liquid foreign assets, including cash and government securities in each significant currency, to cover their maturing foreign currency obligations.
The CBN stated that banks should also have an FX contingency funding arrangement with other financial institutions.
Other recommendations are that banks borrow and lend in the same currency to avoid currency mismatch associated with foreign currency risks.
All the banks are also required to adopt adequate treasury and risk management systems to provide oversight of all FX exposure and ensure reporting on a timely basis.
“Banks are expected to bring all their exposures within the set limits immediately and ensure that all returns are submitted to the CBN, provide an accurate reflection of their balance sheets,” CBN said, promising to sanction erring banks.
Implication of the new CBN’s guidelines
Analysts at Comercio Partners said the guidelines are expected to impact the liquidity dynamics of the dollar rate and the overall economic landscape.
“This regulatory initiative underscores the CBN’s proactive approach to addressing mounting concerns related to excessive foreign currency speculation and hoarding practices observed within Nigerian banks.”
According to the analysts, the immediate impact would be that as the banks adjust their positions on NOP by February 1 and liquidate their net long positions, it could lead to a sudden influx of FX into the market.
However, the increased supply of foreign currency may put downward pressure on its value in the short term.
“If banks comply, it could lead to an immediate reprieve for the forex market and potentially trigger currency appreciation. Investors might witness a strengthening of the local currency against major foreign currencies, including the dollar.”
Nigeria’s banks have profited from FX revaluation gains since the apex bank floated the Naira to the dollar exchange rate.
However, the new regulations may impact their profitability, especially if banks hold significant net-long positions that need to be liquidated, the analysts pointed out, urging that the banks might have to adjust their strategies to comply with the guidelines.
The analyst said compliance with the new CBN’s guidelines could contribute to economic stability.
“A more stable forex market enhances predictability for businesses, investors, and consumers, fostering a favourable economic environment.”
Comercio Partners added that the new rule was a significant regulatory intervention to curb speculative practices in the banking sector.
“The impact on liquidity and the economy will depend on the extent to which banks comply with the guidelines and how swiftly the market adjusts to the new regulations.
“In the coming days, it is crucial to closely monitor market reactions, compliance levels among banks, and any potential ripple effects on broader economic indicators.”