CBN Moves to Stop Banks from Hoarding Forex

By Adedapo Adesanya

The Central Bank of Nigeria (CBN) has released a new directive warning banks from hoarding excess foreign currency for profit.

The new circular introduces a set of guidelines aimed at reducing the risks associated with these practices as the central bank 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.

“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,” a part of the disclosure said.

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.

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.

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.