CBN forecloses financial assistance to banks on liquidity pressure

CBN Governor, Sanusi Lamido Sanusi

The Central Bank of Nigeria (CBN) has foreclosed possibility of financial assistance by way of expanding the discount window to any bank experiencing tight liquidity occasioned by the recent implementation of the 50 percent cash reserve requirement (CRR).

The regulator will also not intervene in the inter-bank market, which with discount window, have become major sources of survival for some banks to meet the financial gap created by the withdrawal of about N1 trillion by CBN from the system recently.

Rather, the CBN, through Kingsley Moghalu, deputy governor (financial system stability), CBN, insisted that the onus was on the banks to prove their mettle based on their strengths and weaknesses and on various business models adopted by them, adding that the new policy was aimed at managing strategic risk in the banking sector.

Deposit money banks (DMBs) have been experiencing tight liquidity following the hike in the CRR on public deposit from 12 percent to 50 percent, with rates at the interbank market experiencing significant rise while the local currency has been under pressure as banks had to struggle to meet their financial obligations to their customers for the twice weekly Wholesale Dutch Auction System (WDAs).

Consequently, BusinessDay interactions with industry operators show that they are looking forward to assistance from the CBN through expanding the discount window.

The discount window (DW) is the medium through which the CBN grants secured lending facilities and outright advances to banks and discount houses. It can be expanded in periods of liquidity pressure for the admittance of non Federal Government bonds (including state bonds and commercial papers) as eligible collateral instruments, and to extend the tenor of liquidity provided under the discount window operations to include structured facilities with maturities of up to 360 days.

The expansion is expected to engender more robust processes of injection and absorption of excess liquidity in the money market.

Responding to BusinessDay inquiry through SMS, Moghalu said: “We are not thinking of offering an expanded discount window for any bank and we have no intention of intervening in the interbank market in favour of any bank or banks.”

According to him, the apex bank believes the banking-crisis phase is over and the banking system has been broadly stabilised, that banks should now play in the marketplace on the strengths or weaknesses of their business models and strategies.

“The CBN directive increasing CRR on public sector money in commercial banks is, in fact, an exercise in managing strategic risk in the banking sector,” he said.

Samir Gadio, emerging markets strategist, Standard Bank, London, observed that although CBN was committed to currency stability, which it sees as its norminal monetary policy anchor, a further naira weakness will probably result in additional direct and indirect measures to tighten liquidity conditions, particularly, if foreign reserves were to come under more meaningful pressure.

Chuka Mordi, director, CBO Capital Partners, said the implications of the policy were not very pretty for those banks that rely on public sector funds for liquidity, stressing “that the rate moved so significantly, shows that there are still fragile institutions in the banking system – they do not have sufficient liquidity from their equity and deposits, hence their reliance on the inter-bank market.”
-BusinessDay