Central Bank of Iran Has High Hopes in OMO

EghtesadOnline: The highly touted monetary mechanism -- open market operation -- to regulate the interbank market, is getting the final touches and will be launched soon, said the governor of the Central Bank of Iran.

News ID: ۷۸۴۷۳۳

22 June 2019

Speaking at a meeting with senior bankers on Tuesday, Abdolnasser Hemmati underlined the OMO’s role in controlling inflation and improving the interbank market.

Hemmati said the CBI has created the conditions for the smooth functioning of OMO.

OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply, according to Financial Tribune.

In the framework of OMO, central banks buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  By the same token, selling government bonds reduces the base money and raises interbank rates.

Earlier in April, the Money and Credit Council – a major monetary decision-making body - approved creation of the OMO.

The policy was endorsed as part of the CBI plan to introduce new instruments in its monetary policy, regulate interest rates, curb inflation and develop a regulated framework for controlling the borrowings of banks from the CBI.

Hemmati took stock of the government’s mountain of debts to banks, adding that the Rouhani administration will use debt securities to reimburse part of its debts to lenders.

“The move will boost the financial capacity of banks and enhance their performance in the [interbank] market,” the CBI website quoted him as saying.

According to earlier reports, in the budget for this fiscal year the government is allowed to securitize up to 200 trillion rials ($1.7 billion) of its debts to banks.

Bonds as Collateral

This is part of the OMO policy followed by the decision to offer Islamic bonds to banks and later let the same be used as collateral by lenders to borrow from the central bank.

Law stipulates that this move covers only debts that are finalized by the end of the previous fiscal year that ended in March.

Hemmati reiterated the dire need to tighten restrictions on bad banks with a mountain of soured loans and promote well-performing lenders.

In a recent report the Majlis Research Center, the expert wing of the parliament, underscored the role and significance of the OMO and said it is a crucial necessity. The think tank, however, outlined prerequisites for its efficacy, the most important being the need to get rid of "bad banks" because these banks simply do not have enough liquidity to buy government bonds.

Boosting Capital

Hemmati stressed the need to boost the capital adequacy of banks as part of the broader CBI plan to reform the lethargic banking industry, noting that “ banks should be strong to support the economy.”

Capital adequacy ratio (CAR) is a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposure.

In line with this plan, Hemmati asked lenders to take practical steps to divest their surplus assets, reiterating the point that banks must not get involved in business activities.

The Economy Ministry announced last week that banks have surplus assets worth an estimated 1,000 trillion rials and plan to divest 400 trillion rials ($3 billion) before the current fiscal is out in March 2020.