…Releases new compliance template, to sanction defaulters

From Adanna Nnamani, Abuja

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To tame the raging foreign exchange crisis and ultimately sanitize the money market, the Central Bank of Nigeria (CBN) is beaming its regulatory searchlight on banks, alerting them of growing risks from their high exposure to FX Net Open Position (NOP).
NOP is the net outstanding balance of all assets, liabilities, and off balance sheet items of banks in a foreign currency.
A bank which holds NOP (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it.
So, the CBN is trying to guide the banks from being too exposed to FX liabilities which ultimately hurts the economy.
In a letter signed jointly signed by
Dr Hassan Mahmud, Director, Trade and Exchange and Rita Ijeoma Sike, who signed for the Director, Banking Supervision, noted that the apex bank was worried about the growth in foreign currency exposures of banks through their NOP.
The statement said the development has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.
To forestall what may boomerang on the banks, the CBN has issued new prudential requirements that seek to manage the risks and avoid losses that could pose material systemic challenges.
Going forward, the CBN stated that NOP limit of the overall foreign currency assets and liabilities both on and off-balance sheet should not exceed 20% short or 0% long of shareholders’ funds (unimpaired by losses using the Gross Aggregate Method).
More so, banks whose current NOP exceeds 20% short and 0% long of their shareholders’ funds unimpaired by losses are required to bring them to prudential limit by February 1, 2024.
“Banks are required to compute their daily and monthly NOP and Foreign currency trading position (FCTP) using designed templates.
“Banks are also required to have adequate stock of high-quality liquid foreign assets, i.e. cash and government securities in each significant currency to cover their maturing foreign currency obligations. 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 C B 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 to provide oversight of all foreign exchange exposures and ensure accurate reporting on a timely basis.
“Banks are expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide an accurate reflection of their balance sheets.
“Please, note that non-compliance with the NOP limit will result in immediate sanction and/or the suspension from participation in the foreign exchange market”.
In a related development, The Central Bank of Nigeria (CBN), yesterday, warned authorized dealers against transaction manipulation in the foreign exchange (FX) nmarket, warning that such actions will attract sanctions.
A statement by the Director, Financial Market Department, Aliyu Ashiru, said CBN investigations have revealed cases of underreporting of transaction rates and fixed income transactions.
The statement reads in part: “All Authorised Dealers are reminded that the Central Bank of Nigeria (CBN) has permitted financial market transactions to be conducted on a ‘willing buyer, willing seller’ basis, and therefore expects prices to be quoted and displayed transparently.
“The attention of the CBN has been drawn to the practice of authorized dealers (and their customers) in reporting inaccurate and misleading information on transactions concluded in the financial market. Ongoing investigations have revealed instances of underreporting of transaction rates and practice of second cheques on foreign exchange and fixed income transactions.
“Deliberate attempts to create price distortion by reporting false transaction details amounts to market manipulation which will not be tolerated and henceforth face sanctions.”