Banks borrowing more from BOJ: Financing alliance profitable for both
The Bank of Jamaica indicated Wednesday that a fivefold rise in the value of securities held by the central bank on behalf of lenders - seen during the last year - was the result of increased borrowings from local banks using BOJ securities as collateral.
Securities held at the BOJ for the commercial banking sector increased from J$12 billion at March 2014 to $60 billion at the end of the June quarter, but dropped back slightly to $58 billion at the end of September.
Compared to 2013, BOJ holdings between March and June increased by a $1.3 billion from $3.5 billion to $4.9 billion, but later rose to $9.1 billion in September of that year.
For the building society sector, BOJ securities have risen elevenfold from $2.32 billion in September 2013 to $26.29 billion at September 2014.
John Robinson, senior deputy governor of the BOJ, said on Wednesday, that the banks have been using their portfolio of BOJ securities as backing for loans from the central bank, which they use for lending to their clients; this following liquidity challenges which arose from the National Debt Exchange event of early 2013.
The BOJ has also been aggressively mopping up liquidity in the financial system, in defence of the Jamaican dollar.
The NDX involved the swapping of Government of Jamaica securities for instruments with lower rates and longer tenors as the Jamaican government sought to make its debt obligations more manageable. In the process, the value of investment holdings in local financial sector shrank.
"Banks were facing a problem, as you know, since the NDX in the sense that for a lot of the securities they hold, the maturities were extended. They did not have the liquidity they had planned for after the NDX," said Robinson.
"What we have done since then is to set up facilities so that they can obtain liquidity on the strength of those securities," Robinson said.
"Until they re-deploy those funds ... until there is a demand for loans of that amount, then they would hold these funds in some very liquid form and the most convenient would be BOJ securities," the central banker added.
He noted that a look at the banks' liabilities would show that securities sold under repurchase agreements have also increased "because they would have borrowed monies against those securities, and you would also see their holdings of BOJ securities going up to the extent that they were holding these funds in short term securities issued by the BOJ."
Since the second half of 2013, the central bank has provided several support points for liquidity, these including its repurchase operation, with bids for specific quantities of liquidity invited on a bi-monthly basis; plus a standing liquidity facility, introduced in December 2013, where deposit takers have automatic access to overnight liquidity from the BOJ.
There was also a six-month repurchase operation - the SMRO facility.
President of the Jamaica Bankers Association, Maureen Hayden-Cater, said that the quarterly central bank disclosure of BOJ securities held, is essentially a "snapshot" of conditions in the market at particular points in time.
The amounts borrowed by the banks, said Hayden-Cater, are likely to be substantially more than the $58 billion to $60 billion, disclosed in the last two quarters.
The JBA president's assertion is bourne out by central bank data. In the last calendar year to September 2014, the BOJ provided $172 billion in direct injections of liquidity to deposit-takers.
However, the central bank stated in its last quarterly monetary report that "the results are not encouraging as private sector credit grew by only 4.8 per cent for the 12 months ending September 2014 and 0.9 per cent in the September quarter alone."
Still, Robinson said BOJ will continue to inject liquidity "so that the banks are in a position to support projects - investment projects."
All the financing windows will remain open, potentially with one exception - the six-month repurchase operations which "was not meant to be a perpetual facility," he said.
"The proceeds could be rolled for a further six months, but we have no intention of rolling that perpetually."
Banks can borrow every two weeks as demand requires. "Of course you know that if any bank is caught sort of liquidity, we have standing facilities that can tide them over till they have more permanent sources," Robinson added.
For the two-week facility, the borrowing rate is 9.0 per cent per annum which, the deputy governor commented, "is not out of line with market rates" and it is the lowest rate on offer by BOJ to the banks, he adds.
For overnight funds, the borrowing rate is 9.5 per cent.
There is a penalty rate for excess borrowing, which is in the region of 11 per cent.
As Robinson defines it, excess borrowing is "the amount above threshold which might be needed, but which betrays a lack of planning or some kind of emergency. On any given day a bank can approach the BOJ for overnight funds. Above that threshold - defined for each bank - there is a penalty rate, but there is no limit on what you can borrow as long as you have collateral."
The BOJ operates on the assumption that the banks plan to lend the funds it borrows or otherwise put it to work. Funds placed on hold with the central bank for 30 days earn 5.75 per cent.
A lending institution won't "want to borrow a lot of money at nine per cent if you do are not planning to lend it or have some purpose defined for it," the deputy governor said.
Acknowledging that interest income for the BOJ is up as a result of the added borrowings by banks, Robinson said, "it is true that we are not doing it at a loss", but he also noted that "we are not doing it for profit".
"We are here to serve and to support the financial system. We do not want to give away public money so we regulate these rates and organise a menu of rates such that people get what they want," he said, while adding, "I would not say we are hurting because of it."
The senior deputy governor also indicated that the banks are profiting nicely from the central bank arrangements noting, saying that "if they do lend to private persons, they earn a nice spread on whatever rate we lend them at".
The average lending rate in the commercial banking sector was last estimated at 14.99 per cent by the BOJ as at October 2014.