By Paneetha Ameresekere
Ceylon Finance Today: Two decisions made by Central Bank of Sri Lanka (CBSL) in the space of nine days under its former Governor Ajith Nivard Cabraal eroded the confidence of foreign banks, from which the markets are yet to recover, sources told Ceylon FT.
"It began by the Monetary Board of the CBSL in its monetary policy statement of 23 September 2014 saying that banks parking their excess liquidity for more than three calendar days a month would be paid a lower standing deposit facility (SDF) rate of five per cent, rather than the standard, and the higher SDF rate of 6.5%," they said.
That statement further said that CBSL would suspend its repo auctions until further notice.
But in a space of nine days, that is, on 2 October, 2014, CBSL resumed its repo auctions, thereby causing uncertainty among foreign banks due to the reversal of CBSL's order made only nine days previously, they said.
This led to foreign banks not only not engaging in interbank lending, but also not parking their excess liquidity in CBSL's SDF window, due to the contradictory stance taken by CBSL in a space of just nine days, sources said.
This way a massive sum of Rs 111 billion worth of excess liquidity was 'lost,' just five days after this new directive was enforced, which was on 7 October, 2014, statistics showed.
Three intervening days between the six days in question, that is, from 4 October to 6 October, 2014, were holidays due to the weekend, coupled with Monday, 6 October, 2014, being a special bank holiday in the island.
And markets are yet to recover from these controversial decisions made by CBSL, they said.
The objective of its 23 September statement was to enhance interbank lending, sources said. It was also a directive to prevent banks which were short, from borrowing from CBSL's standing lending facility (SLF) to meet such shortfalls, by inducing banks which had excess liquidity to indulge in interbank lending, rather than parking their excess in CBSL's SDF window, sources said.
Most of banks' excess liquidity is held by foreign banks which however are constrained in their interbank lending due to limits issues, they said. Therefore, they used to park their excess liquidity in CBSL's SDF window, which earned them an overnight 6.5% interest rate, rather than indulging in interbank lending, sources said. This was particularly so, up to 6 October, 2014.
Meanwhile, the lower five per cent SDF rate was introduced by CBSL on 23 September, 2014 so as to induce such banks to enhance their interbank lending. The weighted average rate of interbank call money rates as at 23 September, 2014 was 6.3%, 130 bps more than the five per cent SDF rate, which however was yet, not large enough a carrot to induce foreign banks to lend to local banks which were short.
The suspension of repo auctions, also, as per CBSL's 23 September directive was another move to induce interbank lending.
Prior to and including 23 September, 2014, the last time CBSL had a repo auction was 11 days previously, that is, on 12 September, 2014. On that day it had a short term repo auction to mop up excess liquidity which fetched a weighted average yield of 6.50%, equivalent to the 6.50% standard SDF rate of 6.50%, but 150 bps more than its lower SDF of five per cent instituted on 23 September, 2014, which is currently being applied, in the event banks park their excess liquidity under CBSL's SDF window for more than three calendar days a month.
But in a space of nine days, on 2 October, 2014, CBSL resumed its repo auctions, thereby causing uncertainty among foreign banks due to the unexpected lifting of this suspension, they said. These incoherent and contradictory decisions by CBSL led to foreign banks not only not engaging in interbank lending, which was the main purpose of the 23 September, 2014 ruling, but also led those banks to not parking their excess liquidity in CBSL's SDF window, sources said.
Instead, they rather preferred to park such excess liquidity in their own vaults, despite the fact that such an action didn't earn them an interest. "They preferred to engage in such an exercise, rather than run the risk of losing their capital in the event they parked such excess liquidity in CBSL's SDF window," sources said.
And, three months later, up to now, this activity by foreign banks is still continuing, they said.
www.ceylontoday.lk
Ceylon Finance Today: Two decisions made by Central Bank of Sri Lanka (CBSL) in the space of nine days under its former Governor Ajith Nivard Cabraal eroded the confidence of foreign banks, from which the markets are yet to recover, sources told Ceylon FT.
"It began by the Monetary Board of the CBSL in its monetary policy statement of 23 September 2014 saying that banks parking their excess liquidity for more than three calendar days a month would be paid a lower standing deposit facility (SDF) rate of five per cent, rather than the standard, and the higher SDF rate of 6.5%," they said.
That statement further said that CBSL would suspend its repo auctions until further notice.
But in a space of nine days, that is, on 2 October, 2014, CBSL resumed its repo auctions, thereby causing uncertainty among foreign banks due to the reversal of CBSL's order made only nine days previously, they said.
This led to foreign banks not only not engaging in interbank lending, but also not parking their excess liquidity in CBSL's SDF window, due to the contradictory stance taken by CBSL in a space of just nine days, sources said.
This way a massive sum of Rs 111 billion worth of excess liquidity was 'lost,' just five days after this new directive was enforced, which was on 7 October, 2014, statistics showed.
Three intervening days between the six days in question, that is, from 4 October to 6 October, 2014, were holidays due to the weekend, coupled with Monday, 6 October, 2014, being a special bank holiday in the island.
And markets are yet to recover from these controversial decisions made by CBSL, they said.
The objective of its 23 September statement was to enhance interbank lending, sources said. It was also a directive to prevent banks which were short, from borrowing from CBSL's standing lending facility (SLF) to meet such shortfalls, by inducing banks which had excess liquidity to indulge in interbank lending, rather than parking their excess in CBSL's SDF window, sources said.
Most of banks' excess liquidity is held by foreign banks which however are constrained in their interbank lending due to limits issues, they said. Therefore, they used to park their excess liquidity in CBSL's SDF window, which earned them an overnight 6.5% interest rate, rather than indulging in interbank lending, sources said. This was particularly so, up to 6 October, 2014.
Meanwhile, the lower five per cent SDF rate was introduced by CBSL on 23 September, 2014 so as to induce such banks to enhance their interbank lending. The weighted average rate of interbank call money rates as at 23 September, 2014 was 6.3%, 130 bps more than the five per cent SDF rate, which however was yet, not large enough a carrot to induce foreign banks to lend to local banks which were short.
The suspension of repo auctions, also, as per CBSL's 23 September directive was another move to induce interbank lending.
Prior to and including 23 September, 2014, the last time CBSL had a repo auction was 11 days previously, that is, on 12 September, 2014. On that day it had a short term repo auction to mop up excess liquidity which fetched a weighted average yield of 6.50%, equivalent to the 6.50% standard SDF rate of 6.50%, but 150 bps more than its lower SDF of five per cent instituted on 23 September, 2014, which is currently being applied, in the event banks park their excess liquidity under CBSL's SDF window for more than three calendar days a month.
But in a space of nine days, on 2 October, 2014, CBSL resumed its repo auctions, thereby causing uncertainty among foreign banks due to the unexpected lifting of this suspension, they said. These incoherent and contradictory decisions by CBSL led to foreign banks not only not engaging in interbank lending, which was the main purpose of the 23 September, 2014 ruling, but also led those banks to not parking their excess liquidity in CBSL's SDF window, sources said.
Instead, they rather preferred to park such excess liquidity in their own vaults, despite the fact that such an action didn't earn them an interest. "They preferred to engage in such an exercise, rather than run the risk of losing their capital in the event they parked such excess liquidity in CBSL's SDF window," sources said.
And, three months later, up to now, this activity by foreign banks is still continuing, they said.
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