The Central Bank of Nigeria (CBN) has expressed concern over the growing foreign currency exposures of banks through their Net Open Position (NOP). In a circular to all banks, signed by its Director of Trade and Exchange, Dr. Hassan Mahmud, and the Director of Banking Supervision, Mrs. Rita Sike, the CBN emphasized that such foreign currency positions expose banks to foreign exchange and other risks.
To manage these risks and prevent potential losses that could pose systemic challenges, the CBN has issued new prudential requirements for banks to comply with. According to the circular, the Net Open Position limit of the overall foreign currency assets and liabilities, considering both on and off-balance sheet items, should not exceed 20 percent short or 0 percent long of shareholders’ funds unimpaired by losses, using the Gross Aggregate Method.
Banks that currently exceed the specified limits are required to bring their Net Open Position to the prudential limit by February 1, 2024. Additionally, the CBN mandates banks to compute their daily and monthly NOP and foreign currency trading position using approved templates.
Furthermore, banks are directed to maintain an adequate stock of high-quality liquid foreign assets, including cash and government securities in each significant currency, to cover their maturing foreign currency obligations. The circular also requires banks to establish a foreign exchange contingency funding arrangement with other financial institutions.
These measures are aimed at enhancing the risk management practices of banks and ensuring the stability of the financial system amid the challenges associated with foreign currency exposures.
