CBI Updates Banks’ Foreign Exchange Rules

EghtesadOnline: In its latest directive, the Central Bank of Iran has raised the limit on the maximum amount to which the ratio of debts and assets held in foreign currencies by all banks and certified non-bank credit institutions can rise.

News ID: ۷۷۸۱۶۶

06 August 2017

"With the aim of reviewing and updating regulations pertaining to the net open positions, the central bank has communicated its Directive on Net Open Positions of Credit Institutions to the banking system," CBI announced in a statement on its official news website.

Net open position indicates the net sum of all foreign currency assets and liabilities of a bank or financial institution, inclusive of all of its spot and forward transactions and off-balance sheet items in that foreign currency.

The new directive was first devised more than a decade and a half ago and had not been updated since because of "fluctuations in the foreign exchange market conditions of the country as a result of internal and external factors in recent years".

However, according to Financial Tribune, because currency fluctuations exert an influence over the conditions of assets and debts held by lenders, CBI has renewed its directive "in line with the standards of the Basel Committee on Banking Supervision and also by reviewing the regulations of other countries and considering the conditions of Iranian credit institutions".

In the directive, the central bank has devised caps for the positive and negative net open positions for credit institutions in "important currencies", namely the US dollar, euro, British pound, Swiss franc and Japanese yen.

The positive net open position is the ratio of the rial equivalent of total assets of a credit institution and the commitments of its customers to the rial equivalent of the total debts and the commitments of credit institution in the same currency.

Meanwhile, the negative net open position is the ratio of the rial equivalent of total debts and commitments of a credit institution to the rial equivalent of total assets of the credit institution and the commitments of its customers in the same currency.

The CBI has decreed that the allowed positive and negative net open positions of each currency can reach a maximum of "15% of the base capital of the credit institution", effectively setting a cap for the ratio of debts and assets.

The directive has ruled that the positive and negative open positions of the credit institutions for all currencies must not go beyond 35% and 30% of base capital respectively.

The positive and negative open positions for all currencies are calculated by adding the total sum of the positive and negative net open positions of the institutions respectively.

However, any bank or non-bank credit institution that boasts a better capital adequacy ratio than the ratios previously decreed by the central bank in line with international standards has been allowed to raise all its net open positions by 5%, meaning that it will effectively be allowed to hold higher debts and assets.

As the latest directive notes, CBI will have the authority to change the caps at any given time "considering market conditions or based on the performance of each credit institution".

What is more, the central bank has decreed that the net open positions for gold will be calculated based on a directive that was first devised by the Money and Credit Council–a decision-making body headed by CBI governor–some 25 years ago and was last updated in the previous year.

The aforementioned directive asserts that "the value of the total of gold, silver, and platinum assets of each bank must never violate 10% of the paid-up capital and free assets of the bank, unless with the special permission of the central bank".

As per the new CBI directive, all banks and credit institutions have been obligated to calculate their net open positions on all currencies and their gold reserves on a daily basis and draft thorough monthly reports that are to be sent to CBI by the middle of the next month.

The central bank will be the official entity that calculates the exact amount of the debts and assets of each bank and credit institution, and will communicate the amounts to them within one month.

"The violation of the directive will face disciplinary measures devised within the framework of regulations," it concluded.