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BOJ introduces permanent liquidity support for banks

Published:Wednesday | December 18, 2013 | 12:00 AM
The Bank of Jamaica, downtown Kingston. - File

The Bank of Jamaica (BOJ) has put in place a new standing liquidity facility (SLF) for deposit-taking institutions to meet their overnight cash needs.

But while the facility has been introduced during the Christmas season, when the demand for cash is seasonally higher, the central bank said it is a permanent fixture to meet liquidity shortfalls at commercial banks, merchant banks and building societies.

President of the Jamaica Bankers Association (JBA), Maureen Hayden-Cater, said the facility would assist the banks to "clear their positions" at the end of the business day.

The measure is being introduced amid public statements from banking and other financial executives that some market uncertainty was driven by the BOJ's tight money policies and, as indicated by Sagicor Life Jamaica president and chief executive officer, Richard Byles, a failure to effectively communicate the end goal.

The BOJ has been using a series of special certificates of deposit to drain liquidity from the market, as a tool to manage demand in the foreign-exchange market.

The central bank has placed 39 of those instruments on the market year to date, including two last week.

Hayden-Cater said Monday that "The overnight facility will assist with liquidity for the commercial banks to clear their positions at the end of the day."

Earlier in the year, she had disclosed that the JBA had lobbied the central bank to ease up on tight monetary policy, noting then that the banks were being starved of cash to lend.

"There are projects in the works to be financed, but we do have a challenge. The most significant cause is monetary policy, which has literally pulled liquidity out of the system," the JBA president said.

The market sentiment prevailed even after the BOJ introduced a special repo facility for financial institutions in July.

The central bank provided some $15 billion of liquidity to the market at a rate of 7.25 per cent per annum during July 17-23; another $2 billion on September 17 at six per cent; and $1.5 billion on September 25 at 7.25 per cent, according to the central bank's quarterly monetary policy report.

The new standing liquidity facility will provide support on an on-going basis, as needed.

"There is no requirement that banks use the SLF and, therefore, there is no minimum limit. The maximum limit is determined by the BOJ, and each institution's limit within this overall maximum is based on the relative asset size," the BOJ said in response to Wednesday Business queries.

The rate on funds is 1.5 percentage points above the BOJ's 30-day CD rate, which translates to 7.25 per cent, the bank also stated.

The CD rate, which is equivalent to the central bank's policy rate, is now at 5.75 per cent.

The SLF became operational on Monday, December 16 and will be reviewed periodically.

No Finite Closure

"There is no finite closure for the SLF," the BOJ said.

Byles, who is also co-chairman of the Economic Programme Oversight Committee (EPOC) monitoring the International Monetary Fund programme, said in late November that progress had been made in addressing the negative impact of the tight Jamaican dollar liquidity in the financial sector, which it had identified as a primary challenge to the programme.

He said the liquidity problem was contributing to a rise in interest rates and restraining banks from extending credit as they would like. EPOC had called on the BOJ to address the matter without doing harm to the overall monetary policy.