Nigeria orders banks to cut forex exposures as naira plunges

The Central Bank of Nigeria ordered banks to limit their foreign exchange exposure to curb risks to the financial system, in the latest move to improve liquidity in the country’s volatile currency market.

The net open position limit of foreign currency assets and liabilities “should not exceed 20% short or 0% long of shareholders’ funds unimpeded by losses,” the regulator said in statement on Wednesday, asking lenders to meet the limits by Feb. 1. The move could push banks to cut speculative bets against the naira, according to Ronak Gadhia, director of sub-Saharan banks research at EFG Hermes

The central bank’s directive comes amid a steep drop this week in the official rate of the naira against the dollar, which has moved it closer to where the Nigerian currency trades on the street. The 31% slide in value was triggered by a change in the method for setting its rate, and is part of larger push by the government since June to stop managing the exchange rate and unify the two markets.

“A dramatic decline in the value of the FX position held by a bank due to a sudden movement in the exchange rate could have an impact on the capital adequacy and solvency of the bank,” said Gadhia. “Reducing the net open position limit also reduces banks’ ability to speculate against the naira and thus makes the currency more stable, which must also be a secondary aim of the regulation.”

Large depreciations in the past created incentives for Nigerian banks to lift dollar holdings to guard against the risk of further naira losses.

The central bank said that it had “noted with concern the growth in foreign currency exposures,” which it said made banks potentially vulnerable to foreign exchange rate and other risks. It said lenders with excess dollars will have to sell them before the deadline or face sanction.

The central bank also directed lenders with an early redemption clause on their eurobonds to seek approval before exercising the option.

In addition, banks are to have an “adequate stock” of liquid assets to cover maturing foreign currency obligations and also put in place a “contingency funding arrangement” with other financial institutions, it said.

Source:norvanreports