CBN Takes Action Against Forex Speculation and Hoarding, Issues New Guidelines
In response to concerns over escalating foreign currency speculation and to mitigate risks, the Central Bank of Nigeria (CBN) has issued a fresh circular directing banks to report their foreign currency exposure. The guidelines aim to address suspected instances of excessive forex speculation and curb the growing trend of banks holding substantial foreign currency positions.
One key directive requires banks to lend in the same currency they borrowed. This move comes amid the ongoing depreciation of the naira against the dollar, exposing many companies to foreign exchange vulnerabilities in the country.
The CBN, in a circular jointly signed by Dr. Hassan Mahmud, Director of the Trade and Exchange department, and Rita Ijeoma Sike, Director of Banking Supervision, expressed concern about the increasing foreign currency exposures of banks through their Net Open Position (NOP). The central bank believes this trend incentivizes banks to maintain excessive long foreign currency positions, exposing them to forex and other risks. To manage these risks effectively and prevent potential systemic challenges, the CBN issued prudential requirements.
The new guidelines stipulate that the Net Open Position (NOP) limit of overall foreign currency assets and liabilities, considering both on and off-balance sheet items, should not exceed 20% short or zero percent long of shareholders' funds unimpaired by losses, using the Gross Aggregate Method. Banks surpassing the 20% short and zero percent long NOP limit are required to adjust to the prudential limit by February 1, 2024.
Additionally, banks are mandated to borrow and lend in the same currency to avoid currency mismatches associated with foreign currency risk. The interest rates for borrowing and lending should align, mitigating basis risk related to foreign borrowing interest rate fluctuations.
The guidelines also touch on Eurobonds, specifying that any early redemption clause should be at the issuer's discretion, and approval must be obtained from the CBN, even if the bond does not qualify as tier 2 capital.
Banks are instructed to adopt robust treasury and risk management systems for oversight of all foreign exchange exposures and accurate reporting on a timely basis. They are required to bring all exposures within the specified limits immediately and ensure that submitted returns accurately reflect their balance sheets. Moreover, banks should maintain an adequate stock of high-quality liquid foreign assets to cover maturing foreign currency obligations and establish a foreign exchange contingency funding arrangement with other financial institutions.