CBN releases fresh directives to check FX speculation, hoarding by banks

The Central Bank of Nigeria (CBN) on Wednesday issued fresh directives to commercial banks in the country to check suspected cases of excessive foreign exchange speculation and hoarding.

The apex bank gave the directives in a new circular titled: “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks.”

These highlight the CBN’s concerns over the growing trend of banks holding large foreign currency positions.

In the circular, the apex bank expressed concern with the growth in foreign currency exposures of banks through their Net Open Position (NOP).

The NOP is a measuring tool used to ascertain a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities (what it owes in foreign currencies).

The CBN stressed that the growth in banks’ foreign currency exposures through their NOP has created an incentive for banks to hold excess long foreign currency positions and exposes them to foreign exchange and other risks.

Consequently, the apex bank directed that the NOP must not exceed 20 percent short (owning more than owning) or 0 percent long (owning no more than the bank’s shareholder funds not reduced by losses) of the bank’s shareholders’ funds.

This calculation, it added, must be done using the Gross Aggregate Method which provides a comprehensive view of the bank’s foreign currency exposure.

READ ALSO: CBN releases fresh $500m to clear verified FX backlogs

Furthermore, the CBN stated that banks with current NOPs exceeding these limits must adjust their positions to comply with the new regulations by February 1.

It warned that non-compliance with the NOP limit would result in immediate sanction for defaulting banks.

The circular read: “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.

“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.”

By: Babajide Okeowo

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