The Central Bank of Nigeria (CBN) has recently issued a crucial circular to all banks, outlining stringent measures to regulate and harmonize reporting requirements on foreign currency exposures. This move comes in response to the notable growth in foreign currency exposures of banks through their Net Open Position (NOP), raising concerns about potential risks to the financial sector.
Key Prudential Requirements:
1. Net Open Position (NOP) Limit: The circular mandates that the overall foreign currency assets and liabilities, considering both on and off-balance sheet items, should not exceed 20% short or 0% long of shareholders’ funds unimpaired by losses, utilizing the Gross Aggregate Method.
2. Adequate Stock of High-Quality Liquid Foreign Assets: Banks are required to maintain a sufficient stock of high-quality liquid foreign assets, such as cash and government securities, in each significant currency. This is to cover their maturing foreign currency obligations. Additionally, banks must establish foreign exchange contingency funding arrangements with other financial institutions.
Other Essential Requirements:
1. Natural Hedging: Banks are instructed to borrow and lend in the same currency, adopting a natural hedging strategy. This is aimed at avoiding currency mismatches associated with foreign currency risk.
2. Interest Rate Basis Match: To mitigate basis risk linked to foreign borrowing interest rate risk, the basis of the interest rate for borrowing should align with that of lending. There should be no mismatch in floating and fixed interest rates.
3. Eurobonds Clause and Approval: Regarding Eurobonds, any clause of early redemption should be at the instance of the issuer, and approval must be obtained from the CBN. This holds true even if the bond does not qualify as tier 2 capital.
4. Treasury and Risk Management Systems: All banks are required to adopt adequate treasury and risk management systems to oversee all foreign exchange exposures meticulously. This ensures accurate reporting on a timely basis.
Immediate Compliance and Consequences:
Banks are expected 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. Non-compliance with the NOP limit will result in immediate sanctions and/or suspension from participation in the foreign exchange market.
This circular underscores the CBN’s commitment to maintaining the stability of the financial sector amidst growing concerns about the potential risks associated with increasing foreign currency exposures of banks. Stakeholders are urged to adhere to these regulations promptly to avoid sanctions and contribute to the overall resilience of the banking industry.