Banks Face Risks over 24hrs FX Positions Sell Down
Non-compliance risk looms large in the financial services sector as the timeline given to deposit money banks to sell down their foreign currency assets appears insufficient for local lenders to make decisions.
Analysts however predicted a request for forbearance by big banks with significant net open positions, noting that some foreign currency assets may not be liquid or easily convertible to cash with the timeline.
In a circular released yesterday, the Central Bank of Nigeria (CBN) expressed concern over the growth in foreign currency exposures of banks through their Net Open Position (NOP) and the associated risks.
The CBN told banks to limit the overall foreign currency (FCY) assets and liabilities of banks to 20.0% short or 0.0% long of shareholders’ funds unimpaired by losses as of February 1, 2024.
“Given the strict timeline of February 1, 2024, banks may need to apply for forbearance on a case-by-case basis. This view is supported by the fact that some of the excess FCY assets may be illiquid and difficult to unwind/sell at short notice”, multi-asset investment banking firm CardinalStone Partners Limited said in a commentary note.
Banks are also required to have an adequate stock of high-quality liquid foreign assets, i.e. cash and government securities in each significant currency, to cover their maturing foreign currency obligations.
In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions.
The new guideline requires that Banks can only borrow and lend in the same currency to avoid currency mismatch associated with foreign currency risks. It added that the basis of the interest rate for borrowing should be the same as that of lending.
According to analysts, this is to reduce the mismatch between floating and fixed interest rates to mitigate basis risks associated with foreign borrowing interest rate risks. The CBN revealed that defaulting banks will be sanctioned and/or suspended from participation in the foreign exchange market.
Amidst uncertainties in the local economy, deposit money banks with significant net long FX positions have seen windfall gains with the continuous devaluation of the Naira and this has encouraged many banks to maintain significant net long FX positions.
With the directive and a 24-hour timeline for compliance, the CBN expects banks to sell down significant net long FX positions running into billions of dollars in 24 hours.
“It suffices to say that many of these dollar assets are not in cash. Firstly, we believe that many banks will require CBN to grant a forbearance and will find other ways besides throwing liquidity into the market to comply such as negotiating the conversion of FCY loans to Naira loans, a conversion that many customers would likely require, given the devaluation of the Naira”, CSL Stockbrokers said in a note on Thursday. #Banks Face Risks over 24hrs FX Positions Sell Down Selloffs Provoke Spike in Nigerian Treasury Bills Yield
