Banks Ostensibly Have Enough Liquidity

EghtesadOnline: During the last round of open market operation by Central Bank of Iran Wednesday, none of the lenders put up their bonds on offer, indicating they are not now in need of liquidity.

News ID: ۷۸۵۴۳۳

29 February 2020

Within the newly launched OMO, banks in need of liquidity offer bonds to be purchased by the central bank or other banks, Financial Tribune reported.

The CBI on Thursday said on its website that “there was no sale orders by banks on the OMO trade platform… this shows liquidity is sufficient in the interbank market”.

The regulator had dismissed sale orders by banks last week because lenders had demanded high prices for their bonds, according to the Persian-language economic newspaper  Donya-e-Eqtesad, a sister publication of the Financial Tribune.

Higher prices quoted by lenders indicate that they are no hurry for liquidity. Had it been otherwise, they would lower the bond prices, the newspaper wrote.

OMO was launched in January as part of CBI monetary policy to reduce lenders’ dependence on the CBI, curb inflation and control interest rates in the interbank market.

The new interbank mechanism enables lenders to better manage their need for liquidity or offer their surplus liquidity in the interbank market.

A Key Tool

Within this framework, central banks can 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.

It constitutes a key instrument of monetary policy under the market based system of monetary management. Essentially, it is used by monetary authorities to regulate the cost and availability of credit in the banking system and influence the level of money supply.

In addition, within the framework, banks can hold bonds as collateral to borrow from the CBI.

The CBI has asked lenders to allocate a portion of their assets to trading in bonds. “On the basis of a new framework, the CBI manages liquidity of banks and non-bank credit institutions based on Islamic bonds. As such, these financial institutions need to allocate a portion of their assets to [buying] bonds,” the CBI said.