The Central Bank of Nigeria, CBN, has ordered banks to stop using foreign exchange revaluation gains for payment of dividends or meet operating expenses. The CBN said the evaluation was to serve as a buffer against emerging economic shocks.
The apex bank disclosed this in a letter to all banks titled: “Impact of Recent FX Policy Reforms: Prudential Guidance to the Banking Sector” and dated September 11, 2023.
The letter signed by the Director, Banking Supervision Department, CBN, Mr. Haruna Mustafa, stated: “The CBN has reviewed the impact of the recent foreign exchange (FX) rate regime change on the banking system and observed its 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 breach the Single Obligor Limit (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.
“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.”