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CBN Issues Fresh Requirements to Mitigate Foreign Currency Risks

The Central Bank of Nigeria (CBN) Wednesday expressed concern over the growth in foreign currency exposures of banks through their Net Open Position (NOP).

The central bank disclosed this in a circular to all banks dated January 31, 2024 and signed jointly by Director, Trade and Exchange, Dr. Hassan Mahmud and Mrs. Rita Ijeoma Sike, Director, Banking Supervision.

The bank noted that such foreign currency positions expose banks to foreign exchange (Fx) and other risks.

Therefore, to ensure that these risks are well managed and avoid losses that could pose material systemic challenges, the apex bank has issued new prudential requirements for banks to comply with.

Going forward, the CBN said the Net Open Position (NOP) limit of the overall foreign currency assets and liabilities taking into cognizance both those on and off-balance sheet should not exceed 20 per cent short or 0 per cent long of shareholders’ funds unimpaired by losses using the Gross Aggregate Method.

Also, banks whose current NOP exceed 20 per cent short and 0 per cent long of their shareholders’ funds unimpaired by losses are required to bring them to prudential limit by February 1, 2024.

Furthermore, banks are required to compute their daily and monthly NOP and Foreign currency trading position (FCTP) using approved templates.

The central bank said banks are also required to have adequate stock of high-quality liquid foreign assets, including 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, the circular noted.

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