CBN Orders Banks To Sell Excess Dollars In 24 Hours

CBN takes measures against banks, requiring them to sell any excess dollars within a day

To reduce forex speculation and risk mitigation, the Central Bank of Nigeria (CBN) has released a new circular on reporting foreign currency exposure to all banks. The central bank addresses possible instances of excessive foreign exchange speculation in a number of guidelines, expressing alarm about the increasing practice of banks holding sizable foreign exchange 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," the CBN said in a circular that was signed by its director, trade & exchange department, Hassan Mahmud, and his banking supervision colleague, Rita Ijeoma Sike.

The “Harmonization of Reporting Requirements on Foreign Currency Exposures of Banks” circular informed the banks that, when using the gross aggregate method, the Net Open Position (NOP) limit of all foreign currency assets and liabilities, including those on and off the balance sheet, should not exceed 20 percent short or 0 percent long of shareholders' funds unimpaired by losses.

Read: ‘We Do Not Currently Sell Dollars To Nigerians’ — BDC Operators Close Market

The most recent circular was issued just 48 hours after the CBN issued one cautioning banks and foreign exchange dealers not to report fictitious exchange rates, among other things.

The circular issued on Monday states that by February 1, 2024, banks whose current NOP exceeds 20 percent short and 0 percent long of their shareholders' funds unimpaired by losses must bring them up to the prudential limit. The banks must now use the accompanying templates to calculate their daily and monthly NOP and foreign exchange trading position.

The CBN accused banks of holding excess foreign exchange positions in its most recent circular, which was published on Wednesday. This accusation appears to be related to efforts to fund FX requests at the official window. Consequently, the central bank granted lenders until today, February 1, 2024, to liquidate their excess dollar holdings.

The CBN orders all banks to promptly reduce all of their exposures to the predetermined limits and to make sure that the balance sheets they submit to the CBN are accurately reflected in all of their returns. “Please, note that non-compliance with the NOP limit will result in immediate sanction and/or suspension from participation in the foreign exchange market,” the central bank stated. In order to meet their maturing foreign currency obligations, banks must also maintain a sufficient stock of high-quality liquid foreign assets, such as cash and government securities, in each major currency.

In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions. “Banks should borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign currency risk. The basis of the interest rate for borrowing should be the same as that of lending i.e. there should be no mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.

“With respect to Eurobonds, any clause of early redemption 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. All banks are required to adopt adequate treasury and risk management systems,” the circular read in part.