CBN express fear over banks excessive forex exposure

The Central Bank of Nigeria (CBN) has shown concern about the level of foreign exchange exposure by Deposit Money Banks (DMBs).

As a result, the regulator has issued a set of stricter prudential requirements to mitigate potential risks and safeguard the financial system.

Also, the Senate out of concern for the continuous depreciation of the Naira, has invited the CBN Governor, Dr. Olayemi Cardoso, to appear before it on Tuesday.

The CBN’s concern stemmed from banks holding excessive amounts of foreign currency, exposing them to potential losses from exchange rate fluctuations, interest rate changes and other market risks.

To address these concerns, the Trade and Exchange Department of the CBN in a letter dated January 31, 2024 and signed by Dr Hassan Mahmud, Director Trade and Exchange and Mrs. Rita Ijeoma Some, for Director Banking Supervision, has introduced a stricter Net Open Position (NOP) limit of “20 percent short or 0 percent long of shareholders’ funds unimpaired by losses, using the Gross Aggregate Method”.

The NOP reflects the difference between a bank’s foreign currency assets and liabilities, both on and off the balance sheet.

According to the CBN, banks cannot hold significantly more foreign currency liabilities than assets (20% short), in addition, they also cannot hold any more foreign currency assets than liabilities (0% long).

This new regulation significantly narrows the previous range of allowed positions, limiting banks’ overall exposure to foreign currency risks. In other words,

Banks exceeding the new NOP limits have until today to bring their positions within the revised range.

Also, banks are now mandated to maintain sufficient stocks of high-quality liquid foreign assets, such as cash and government securities, across major currencies to cover maturing FX obligations.



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