CBN Orders Banks to Save FX Revaluation Gains as Buffer Against Shocks

The Central Bank of Nigeria (CBN) has instructed commercial banks to conserve their foreign exchange revaluation gains as a counter-cyclical buffer to mitigate any future adverse effects of exchange rate fluctuations.

 The CBN also granted forbearance to banks that breached the prudential limits on single obligor and net open position due to the recent FX policy change.

In a letter dated September 11, 2023, signed by the Director, Banking Division Department, Haruna Mustafa, the CBN directed banks to implement the new guidelines immediately. The letter was obtained by Newsflash Nigeria, a reputable online news platform.

FX revaluation gains occur when the value of a bank’s assets and liabilities denominated in foreign currency increases due to a change in the exchange rate between the foreign and the local currencies.

The CBN said it had assessed the impact of the recent FX rate regime change on the banking system and found that it could significantly affect the Naira values of banks’ foreign currency assets and liabilities.

The CBN stressed that banks should use these revaluation gains to strengthen their capital reserves, thereby enhancing the banking sector’s resilience to volatility and economic shocks.

The letter stated that “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 dividends or meet operating expenses.”

The letter also stated that banks that inadvertently breached the Single Obligor Limit (SOL) or the Net Open Position (NOP) limit due to the FX policy change would be granted forbearance upon application to the CBN.

 The SOL is the maximum amount that a bank can lend to a single borrower, while the NOP is the maximum amount of foreign currency exposure that a bank can have.

The forbearance would apply only to existing facilities as of the effective date of the policy and would exempt such banks from the regulatory deductions on the excess above the limits in their Capital Adequacy Ratio (CAR) computation.

The letter further stated that existing prudential regulations on capital adequacy, dividend payments, and foreign currency borrowing limits would continue to apply.

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