CBN urges banks to treat FX gains as protection against future fluctuations

The Central Bank of Nigeria (CBN) has advised banks in the country to treat gains in their foreign currency (FCY) assets and liabilities arising from the recent foreign currency policy as a protection against future negative movements in the FX rate.

In a circular titled “The Impact of Recent FX Policy Reforms: Prudential Guidance to the Banking Sector” and sent to all banks on Monday, CBN saw the need to provide much-needed guidance in the face of recent FX fluctuations. This is to prevent them from using these FX revaluation gains to pay dividends or meet operating expenses.

The circular, signed by Haruna Mustafa, Director, Banking Supervision Department of the CBN, read, “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 dividends or meet operating expenses.”

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The apex bank also added that banks that unintentionally violate the Single Obligor Limit (SOL), where they are not allowed to grant more than 20 percent of their shareholders funds to any one person (natural person or corporate body), including their subsidiaries, associates, and related parties, will be granted forbearance upon application to the CBN.

It read further, “Inadvertently breaching the Single Obligor Limit (SOL) due to FX policy will be granted forbearance upon application to the CBN. The forbearance shall apply only to existing facilities as at the effective date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.”

The CBN also added that, seeing the impact of the recent FX regime change, “banks that exceed the Net Open Position (NOP) prudential limits due to the FX revaluation and shall be granted forbearance for the breach upon application to the CBN.”

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The apex bank also informed banks “that existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply.”

In summary, banks were advised to build capital buffers to not only increase their FCY assets but also help increase resilience and protection against potential volatility and economic shocks.