CBN Issues New Guidelines to Curb Foreign Currency Speculation and Hoarding by Commercial Banks

In a bid to tackle foreign currency speculation and hoarding by commercial banks, the Central Bank of Nigeria (CBN) has released a circular containing new guidelines. The document, jointly signed by the Directors of Trade and Exchange, Hassan Mahmud, and Director of Banking Supervision, Rita Sike, disclosed the discovery of banks’ foreign currency exposures through their Net Open Position (NOP).

The NOP measures the disparity between a bank’s foreign currency assets and liabilities. The CBN’s circular aims to mitigate risks associated with prolonged hoarding and speculation of foreign currencies by Nigerian banks.

To address these issues, the CBN has introduced prudential rules, including a Net Open Position (NOP) limit. The limit dictates that the overall foreign currency assets and liabilities, on and off-balance sheet, should not exceed 20% short or 0% long of shareholders’ funds unimpaired by losses using the Gross Aggregate Method.

Banks with NOP exceeding the specified limits are required to rectify their positions by February 1, 2024. The circular mandates banks to compute their daily and monthly NOP and Foreign Currency Trading Position (FCTP) using provided templates.

Moreover, the CBN requires banks to maintain a sufficient stock of high-quality liquid foreign assets to cover maturing foreign currency obligations and establish foreign exchange contingency funding arrangements with other financial institutions. The circular emphasizes the importance of natural hedging by borrowing and lending in the same currency to avoid currency mismatch risks.

Regarding Eurobonds, any clause of early redemption must be at the issuer’s instance, with approval obtained from the CBN, even if the bond doesn’t qualify as tier 2 capital. The guidelines stress the adoption of adequate treasury and risk management systems by all banks to oversee foreign exchange exposures and ensure accurate reporting.