"The rules for determining and regulating the open currency position limit of the authorized banks of the Azerbaijan Republic are aimed at regulating the banks’ exchange rate risk on foreign currency transactions,” the source said. “The open foreign currency position characterizes the difference between claims and liabilities by currency. This creates risks of loss of funds in terms of unfavorable currency exchange rate for banks.”
The source said that the restoration of a requirement on the limit is related to the fact that the CBA started issuing loans to the banks in national currency, loans in the form of overdraft, carrying out swap operations, etc.
"In other words, thanks to these credit tools, the CBA created all necessary conditions for banks to regulate the interbank transactions,” the source said. “This allowed obliging the banks to comply with the open currency position limit."
“Thus, the CBA managed to avoid the possible problems with the restoration of a requirement on the open currency position limit of the banks that could arise in the future in case of continued validity of the decision for a longer period,” the source said.
Freezing the net foreign exchange position limit enabled banks to increase the operations on the currency market without fearing to go beyond the regulatory framework of the Central Bank.
Because, following the devaluation of manat on Feb.21, the vast majority of the population started to convert their funds into US dollars, but many banks went beyond the CBA regulations since the loans were primarily issued in manats.
As a result, banks were not able to issue loans in manats and had to give loans in US dollars, or violate the regulator’s requirements.
Banks would be more sensitive to changes in exchange rates if the requirements for net short position limit maintained.
In this case, even slight changes in the exchange rate could lead to considerable decline in banks’ profitability and negatively affect the capital and capital adequacy.
Such a hypersensitivity of the banking system could lead to a loss of public confidence in banks and even more complicate the further lending to the real sector of the economy.
On the other hand, easing the currency trading for banks could lead to an increase in banks` speculative demand for foreign currency, as well as potential growth in the volatility of the exchange rate.
Currently, 43 banks operate in Azerbaijan.
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