Central Bank of Nigeria (CBN) has released a new directive warning banks from hoarding excess foreign currency for profit.
The new circular from the apex bank introduces a set of guidelines aimed at reducing the risks associated with these practices as it believes some commercial banks hold long-term FX positions so they can profit from the volatile movements.
In a circular titled Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks, the CBN raised concerns over the growing trend of banks holding large foreign currency positions.
To address these issues, the CBN has now issued prudential requirements that banks must follow. A key focus of these requirements is the management of the Net Open Position (NOP).
The NOP measures the difference between a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities (what it owes in foreign currencies).
The circular mandates that the NOP must not exceed 20 per cent short (owning more than owning) or 0 per cent long (owning no more than the bank’s shareholder funds not reduced by losses) of the bank’s shareholders’ funds.
This calculation, the apex bank said, must be done using the Gross Aggregate Method, which provides a comprehensive view of the bank’s foreign currency exposure.
Banks with current NOPs exceeding these limits are now 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.
The CBN also directed banks to maintain adequate stocks of high-quality liquid foreign assets, such as cash and government securities, in each significant currency.