Recent happenings in the financial services industry occasioned by the closure and takeover of two discount Houses, Express and Consolidated by the Central Bank of Nigeria (CBN) and the need to meet year end regulatory requirements, among others, are making banks to embrace the CBN discount window facilities at the expense of the interbank market, Business Day investigations have shown.
Consequently, the development has brought about discrimination among the banks, particularly those that lost cash to the two Houses and are now trying to hedge against future losses, hence their recourse to standing deposit and lending facilities, (SDF and SLF) respectively for their overnight excess cash, even at higher costs than when placed among themselves.
CBN alluded to this in its current third quarter economic report, when it revealed that banks’ overnight deposit (SDF) of their excess cash in the last quarter increased 135 percent to N14.4 trillion over the preceding quarter just as banks borrowed (SLF) N5.7 trillion or 124 percent over N2.6 trillion in the preceding quarter.
“Deposit Money Banks (DMBs) and Discount Houses (DHs) do not necessarily prefer to patronise the CBNs SDF window on a regular basis. However, recent developments in the financial system, such as the closure of two DHs has required enhanced “risk management” on interbank lending,” says, Usoro Essien, of Economic Intelligence & Strategy, Associated Discount House, (ADH) limited.
Razia Khan, analysts with Standard Chartered Bank, London, while acknowledging that the interbank market does not appear to be working as it should, said, “It suggests that banks would rather place money with the CBN than with each other – so credit concerns may be playing a role. But at the same time, there isn’t a stigma attached to accessing the discount window – so this is not a credit crunch, with all that might mean for the economy.”
Specifically, the CBN in the report said, “The bank’s discount window also remained open to authorised dealers to access both the standing deposit facility (SDF) and standing lending facility (SLF). The significant increase in activities in the standing facilities window was attributed mainly to the banks ‟preference for depositing their overnight balances at the discount window rather than placing at the interbank,” the CBN says
BusinessDay investigations also revealed that frequent cash requirements by banks to meet some regulatory and customer requirements, such as the cash reserve ratio (CRR) and 0.5 percent contributions towards the Asset Management Corporation of Nigeria (AMCON) levy, are other compelling reasons for patronage of the window facilities.
The development tends to have polarised the market with major players, which are highly liquid patronising one another, while the less liquid ones are left to their fate, or to access these funds at higher rates, even from the big players, for what they regard as the ‘risk’ involved.
The inter-bank rate fell slightly by 29 basis points (bp) over the weekend due to improved market liquidity via treasury bills (NTBs and OMO) repayment with call/overnight and 7-day money market rates at 10.5 percent and 11.0 percent respectively. The 3 month NIBOR was 12.3 percent though fewer activities were done on the tenor; while the inter-bank secured lending (Open Buy Back) fell to 10.3 percent.
The SDF and SLF windows are avenues for Deposit Money Banks, (DMBs) and Discount Houses (DHs) to place their excess liquidity with the CBN or borrow from the CBN via REPO when the need arises.
While Standing Deposit Facility (SDF) is calculated as the MPR – 2.0 percent equivalent to 10 percent, Standing Lending Facility (SLF) on the other hand is MPR + 2.0 percent or 14 percent.
Although some analysts would not attribute the development to credit crunch as reminiscent in 2008/2009 period, they however call for a more prominent intermediary role by CBN.
Speaking further, Khan said, “It’s not ideal that they prefer to access the discount window rather than place or borrow interbank funds. There is no credit crunch. The situation merely calls for the CBN to play a more prominent intermediary role. This is not the same as 2008 or 2009 when there were real fears about the viability of some banks.”
The year-end syndrome where financial institutions attempt to properly manage their balance sheet to meet desired positions at the end of the financial year, may also limit interbank activity between market players.
Source: BusinessDay
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