CBN 1

CBN releases new measures for banks to manage FX risks

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The Central Bank of Nigeria, CBN, on Wednesday raised concerns over the increase in foreign currency exposures among Nigerian banks.

In a bid to manage risks and prevent potential losses with systemic implications, the CBN issued stringent lending requirements for commercial banks.

The requirements are contained in a circular addressed to all banks and signed by the duo of the apex bank’s Director of Trade and Exchange, Hassan Mahmud, and the Director of Banking Supervision, Rita Sike.

The bank expressed worry over the increasing incentive for banks to maintain excess long foreign currency positions, exposing them to various foreign exchange risks.

The measures include restrictions on the overall foreign currency assets and liabilities and instructions for banks not to exceed 20 per cent short or 0 per cent long of shareholders’ funds unimpaired by losses using the Gross Aggregate Method.

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The CBN said banks found to exceed these limits are mandated to rectify their positions by February 1.

It added that the banks must calculate their daily and monthly Net Open Positions (NOP) and Foreign Currency Trading Positions (FCT) using the templates provided by the apex bank.

Adequate stock of high-quality liquid foreign assets is mandatory to cover maturing foreign currency obligations, it added.

The CBN also mandated banks to establish foreign exchange contingency funding arrangements with other financial institutions.

According to the statement, the CBN also directed banks to adopt a natural hedging strategy by borrowing and lending in the same currency to avoid potential currency mismatches and associated foreign currency risks.

The directive also emphasised the importance of interest rate matching to mitigate basis risk related to foreign borrowing interest rate risk.

The CBN’s directives also include requirements for the approval of bonds to ensure compliance with tier 2 capital standards, raising concerns about the necessity for timely and accurate reporting.

“With respect to Eurobonds, any clause of early detection should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier 2 capital”, it said.

It said banks must promptly align all their exposures within the specified limits and ensure that all submissions to the CBN accurately reflect their balance sheets.

Non-compliance with the NOP limit will result in immediate sanctions and suspension from participating in the foreign exchange market, the apex bank said.

 

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