See https://www.nbg.gov.ge/uploads/tibr/tibreng.xlas for interbank rates and volumes, and https://www.nbg.gov.ge/uploads/tibr/mmieng.xls?1476710810483 for an overview of money market indicators.
The NBG liquidity provided in excess of the system wide cap was priced at a penal rate, a cost which in turn, fed into the cost of liquidity in the market. In general, it is not recommended that central banks introduce limits as part of their regular monetary policy operations.
In addition to the assets described, the NBG also accepts lari-denominated NBG certificates of deposit, government securities, and international financial institution bonds.
For example, in late 2013, the NBG sold about 15 percent of its reserves, while also allowing the currency to depreciate by 7 percent.
Though at times the interbank rate does settle below the NBG deposit facility rate, which should be investigated further by the NBG (it appears that one small bank may not be so sophisticated from a liquidity management perspective).
As noted in the December 2014 FSAP, the NBG accepted for a period floating rate mortgages as collateral. In discussions with market participants, the withdrawal of these measures was not raised as a concern, but this is not to say that concerns may have existed at the time of the collateral policy tightening.
The ECB has a maintenance period operation as part of its toolkit.
This would be helpful if the NBG had a monthly reserve maintenance period, but this also needs to be balanced against the liquidity forecasting capabilities of the banks over a longer (maintenance) period.
On first inspection, it appears that there is sufficient collateral within the system, because as at September 27, 2016, the total monetary policy borrowings stood at GEL 950 million, while unencumbered monetary policy eligible collateral buffers stood at roughly GEL 2,595 million. Though the mission team did not discuss trends in the liquidity deficit (i.e., amount borrowed by the system) or projections for the liquidity deficit going forward.
The NBG currently imposes a credit claim limit of 1 million lari per debtor.
The NBG could examine the acceptance of bank certificates of deposit, but there are two main reasons why the majority of central banks stay shy of this type of collateral; (i) the potential for reciprocal use of collateral needs detailed monitoring (this practice was evident amongst the Icelandic banks in the Eurosystem, and (ii) ‘close links’ would need to be monitored so that a bank does not subject collateral of which it has a significant relationship (for example, an entity within its own banking group). See https://www.ecb.europa.eu/press/pr/date/2015/html/pr150220.en.html for further details on how the ECB tries to control for ‘close links.’ However, the acceptance of these assets could contribute to the development of term-funding markets, but it may be preferable to develop secured rather than unsecured markets.
Though it seems to be the case that, at present, a counterparty cannot pledge collateral that matures within the term of the operation, if so, this would need to be addressed first.
Bank for International Settlements (BIS) “Central bank collateral frameworks and practices” (2013) available at http://www.bis.org/publ/mktc06.pdf, provides a good overview of country practices regarding the levels of these ‘add-ons.’
In the case of credit claims for monetary policy purposes this would normally involve the establishment of eligibility criteria and risk controls for performing loans only. It would be expected that for emergency idiosyncratic operations, credit claims with some level of impairment may need to be looked at, and suitably controlled from a risk perspective, if it was decided to accept these assets.
Nonetheless, it would be helpful if the counterparty updated the information (certain variables for loan collateral, such as repayment amounts, etc.) relating to pre-positioned portfolios on a monthly basis.
Confidentiality agreements with these entities could be helpful.
See for example, the ECB’s General Documentation available at https://www.ecb.europa.eu/press/pr/date/2015/html/pr150831_1.en.html or the BoE’s Red Book available at http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf.
FX swaps could also be a positive development from a market development perspective, but their objectives would need to be clear. For example, if used as a monetary policy fine tuning instrument, the maturity of these operations should be consistent with the current money policy instruments. On the other hand, if used as a market development instrument, FX swaps should be two-way and be launched regularly.
Furthermore, the NBG should remove any restrictions around the acceptance of collateral with a maturity date less than that of the operation, as this could constrain collateral holdings of the system.
The TA mission did not look at the liquidity forecasting methods of the NBG or the methods used to determine the amount of liquidity it injects into/takes from the system.
Even though domestic and foreign currency assets are close substitutes in a highly dollarized economy such as Georgia, central bank operations may affect both markets differently. An effective liquidity monitoring of these markets requires clearly identify the sources of potential liquidity pressures both in FX and lari money markets.
The longest tenor the NBG can issue CD’s is six months, while the shortest tenor the MoF can issue bills is one year, though the option of issuing six-month bills is being explored, and possibly shorter tenors for cash management purposes.
The market cited that the FX swap market was particularly thin, possibly reflecting the current macroeconomic environment.
The NBG does impose limits on banks’ net open positions. http://www.nbg.ge/uploads/legalacts/supervision/nbg22.214.171.124regulation_settingeng.pdf.
The proposed LCR ratio will be applied to all banks.
A CLF is a contractual arrangement between a bank and the central bank, through which banks—for a fee—have on-demand access to liquidity. This Facility counts toward high quality liquid assets in LCR ratios.
Any access to the CLF should be seen as a last resort and only once all other reasonable steps have been taken to manage their liquidity risks without recourse to the NBG, while a commitment fee should try to equalize incentives between those who have access and those who do not.
Consideration should be given to reassessing the appropriateness of FX run-off assumptions. In particular, the preferential treatment of FX compared with local currency within the LCR framework. Within the LCR framework, FX deposits should be treated as ‘less stable,’ which attracts a higher run-off rate (see paragraph 79 of Basel III: The LCR and liquidity risk monitoring tools, January 2013). Equally within the LCR there is also an expectation that the currencies of the stock of HQLA should be similar in composition to the operational needs of the bank. Banks and supervisors cannot assume that currencies will remain transferable and convertible in a stress period, even for currencies that in normal times are freely transferable and highly convertible. Also, if the NBG is pursuing a de-dollarizing strategy, preferential treatment for FX is questionable.
As noted in the 2014 FSAP, the growth of FX deposits warrants close monitoring and ‘the NBG should consider applying further measures to prevent the build-up of systemic liquidity risk.’ (Box 1, Macroprudential Technical Note available at https://www.imf.org/external/pubs/cat/longres.aspx?sk=42588.0). Such a consideration could involve increasing run-off rates for FX deposits.
A central bank’s ability to provide LOLR in FX will in most cases be limited, and this should be made clear to the market but without announcing limits. Prudential tools should be used to reduce the risk that such needs arise, and would outstrip FX resources available but may not be sufficient to eliminate it.
In general, risks associated with monetary policy are generally not indemnified; to preserve the independence of the central bank the ensuing risks are covered by its capital. Risks associated with LOLR are typically covered by government guarantees.
Indemnities should be fully enforceable, irrevocable and unconditional guarantees that rank pari passu with other government obligations.
For more details on LOLR please see Marc Dobler, Simon Gray, Diarmuid Murphy, and Bozena Radzewicz-Bak, ‘The Lender-of-Last-Resort Function after the Global Financial Crisis,’ IMF Working Paper (WP/16/10), January 2016: https://www.imf.org/external/pubs/ft/wp/2016/wp1610.pdf.