CBN Implements Crackdown on Banks: Orders Sale of Excess Dollars Within 24 Hours

The issuance of the new circular by the Central Bank of Nigeria (CBN) underscores its proactive approach to regulating the foreign currency exposure of banks, aimed at curbing forex speculation and enhancing risk mitigation measures within the financial sector.

The CBN’s concerns about the escalating foreign currency exposures of banks, particularly through their Net Open Position (NOP), reflect a growing trend that could potentially expose these institutions to significant foreign exchange and other risks. By addressing suspected cases of excessive foreign currency speculation, the CBN aims to ensure the stability and resilience of the banking system against potential systemic challenges.

Through the implementation of prudential requirements outlined in the circular, the CBN aims to compel banks to adopt robust risk management practices and to refrain from holding excessive long foreign currency positions. These measures are designed to mitigate the likelihood of losses that could arise from overexposure to foreign exchange risks, thus safeguarding the financial health of banks and the overall stability of the economy.

The collaborative effort of the CBN, as evidenced by the joint signing of the circular by key officials from the trade & exchange department and banking supervision, underscores the gravity of the issue and the importance of concerted action in addressing it effectively.

Overall, the issuance of the circular reflects the CBN’s commitment to promoting a sound and resilient banking sector, fostering financial stability, and enhancing confidence in the Nigerian economy’s ability to withstand external shocks.

The circular, titled “Standardization of Reporting Guidelines for Banks’ Foreign Currency Exposures,” instructed banks to adhere to a Net Open Position (NOP) limit concerning their total foreign currency assets and liabilities, inclusive of both on and off-balance sheet items. The specified limit mandates that the NOP should not exceed 20 percent short or 0 percent long of shareholders’ funds unimpaired by losses, employing the gross aggregate approach.

This recent directive follows closely on the heels of another circular issued by the CBN, cautioning banks and FX dealers against inaccurately reporting exchange rates and other related matters, underscoring the regulator’s commitment to maintaining transparency and integrity within the foreign exchange market.

As per the circular released on Monday, banks with Net Open Positions (NOP) surpassing 20 percent short or 0 percent long of their shareholders’ funds unimpaired by losses must adjust them to meet the prudential limit by February 1, 2024. Additionally, banks are mandated to calculate their daily and monthly NOP and Foreign Currency Trading positions utilizing the provided templates.