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Central Bank of Nigeria (CBN) has issued fresh rules to guide banks against abuse of ongoing forex reforms. According to a circular, BSD/DIR/CON/LAB/16/020, signed by Director, Banking Supervision Department, Haruna Mustafa, CBN reviewed impact of recent foreign exchange rate regime change on the banking system and observed its potential to significantly increase naira values of banks’ Foreign Currency (FCY) assets and liabilities, resulting in varying levels of FX revaluation gains or losses across the industry.
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The bank noted that additional implications of foreign exchange policy reforms may include breaches of single obligor and net open position limits, possible increase in asset quality risks, and pressure on industry capital adequacy.
CBN, therefore, approved prudential guidance and directives for immediate implementation by banks. Under treatment of foreign exchange revaluation gains, banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilise such FX revaluation gains to pay dividend or meet operating expenses.
Under Single Obligor Limit (SOL), banks that inadvertently breach the limit, due to the foreign exchange policy, will be granted forbearance upon application to the CBN. The forbearance shall apply only to existing facilities as at effective date of the policy.
With regards to Net Open Position (NOP), banks that exceed prudential limits due to the foreign exchange revaluation shall be granted forbearance for the breach upon application to the CBN. Existing prudential regulations on capital adequacy, dividend payments and FCY borrowing limits shall continue to apply.
CBN stressed that banks are encouraged to build capital buffers to increase resilience against potential volatility and/or economic shocks, adding that it will continue to monitor emerging vulnerabilities and take appropriate regulatory action.
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