Stop Spending Gains Made From Forex Revaluation, CBN Warns Banks

… Directs Banks To Build Buffers Against Economic Shocks

The Central Bank of Nigeria has warned banks to stop spending gains made from forex revaluation.

The apex bank said this in a circular dated September 11, and signed by the CBN Director, Banking Supervision, Haruna Mustafa.

Forex revaluation gains refer to the increase in the value of a bank’s assets and liabilities denominated in foreign currency when there is a change in the exchange rate between the foreign currency and the local currency.

Nigerian banks mostly reported massive profits in the half-year results mostly arising from the depreciation of the naira following the unification of exchange rate windows.

The depreciation notionally increased the balance sheet of the banks in naira based on their forex holdings. The apex bank fears, that banks could be tempted to spend the profits making them vulnerable if the exchange rate strengthens.

The apex bank distributed a letter to all banks, detailing directives that must be immediately implemented.

The CBN said the move is aimed at bolstering the Nigerian banking sector amid volatile foreign exchange rates.

The CBN stated that these gains will serve as counter-cyclical buffers and cannot be utilized for dividend payouts or operating expenses.

The circular reads, “The Centra! Bank of Nigeria has reviewed the impact of the recent foreign exchange (FX) rate regime change on the banking system and observed as 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.

“Additional implications of the FX 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.

“The Bank thus approved the following prudential guidance and directives for immediate implementation by banks:

“Treatment of FX 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 utilize such FX revaluation gains to pay dividend or meet operating expenses.

“Single Obligor Limit (SOL): Banks that inadvertently breech the Single Obligor Lime (SOL) due to the 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.

“Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX 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. Banks are encouraged to build capital buffers to increase resilience against potential volatility and/or economic shocks.

“The CBN will continue to monitor emerging vulnerabilities and take appropriate regulatory action.”