The Central Bank of Nigeria (CBN) on Wednesday imposed limits on how much banks can hold in foreign currencies and expressed its concern about the growth of forex exposures on the lenders’ balance sheets following the sustained depreciation of the Naira against the US dollar and other foreign currencies over the past weeks.
The NOP measures the difference between a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities
In a letter with Ref No TED/FCM/PUB/FPC/001/010 issued on January 31 and signed by its Director, Trade & Commerce, Dr. Hassan Mahmud, and Rita Ijeoma Chike for Director, Banking Supervision, the apex bank noted that the deposit money banks’ (DMBs’) exposures through their NOP had created incentives to them to hold long foreign currencies positions, which exposed them to FX and other risks.
It stated that to ensure that these risks were well managed and avoid losses, the letter on ‘Harmonization of Reporting Requirements on Foreign Exchange Exposures of Banks’ was issued.
Specifically, the CBN letter directed that banks’ “NOP must not exceed 20% short (owning more than owning) or 0% long (owning no more than the bank’s shareholder funds not reduced by losses) of the bank’s shareholders’ funds.
“This calculation must be done using the Gross Aggregate Method, which provides a comprehensive view of the bank’s foreign currency exposure.
“Furthermore, banks with current NOPs exceeding these limits are required to 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 added.
Similarly, the letter to the banks also stipulated that banks should maintain adequate stocks of high-quality liquid foreign assets, such as cash and government securities, in each significant currency.
The CBN further directed: “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.”
Other requirements outlined in the letter included the need for the lenders to practice natural hedging by borrowing and lending in the same currency to avoid currency mismatch risks.
It expatiated: “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. reporting on a timely basis”, the apex bank stipulated.
This is even as it advised the DMBs to ensure that the basis of the interest rate for borrowing matched that of lending, with a view to mitigating basis risks associated with foreign borrowing interest rate risk.
