Explanation to Banks of New Monetary Policy instruments

[Chief V]

Explanation to Banks of New Monetary Policy Instruments

Monetary Policy Instruments

The design of a central bank’s monetary policy instruments should serve both to foster efficient short-term liquidity management by banks and to deliver the central bank’s desired monetary policy (which can be measured by a variety of intermediate variables, including the yield curve, the exchange rate, and the rate of growth of the monetary supply). With regard to liquidity management, the central bank’s policy instruments must work together with money and securities markets and an efficient payment system to provide banks with confidence that they can always meet their payment obligations at a reasonable cost. The most certain, but also the most costly, form of liquidity is provided by excess reserves (vault cash and balances with the central bank in excess of required reserves). Intermediation spreads (the difference between interest rates on deposits and on loans) can be narrowed by enabling banks to minimize their holdings of non-interest yielding excess reserves. Bank’s ability to minimize excess reserves depends on the availability of other reliable means of liquidity management.

The CBI currently has the following active and passive instruments that affect market liquidity (base money):

• Foreign exchange auctions, in which the CBI buys or sells dollars to the market in light of its policy objectives;

• A reserve requirement regulation that requires banks to hold in relation to their customers deposits: differentiated levels of deposits with the CBI, vault cash, and MOF securities.

• An Overdraft Facility, for banks with reserve account balances at the CBI that are not sufficient to settle their net end of day payment obligations;

• A Discount Window for bills of exchange and similar bank paper with a maturity of less than 90 days and at least two endorsements (currently charging 11% for good quality paper);

• Lender of Last Resort Facility, which provides individually negotiated loans against collateral, for banks with chronic liquidity problems;

• MOF securities Window, at which banks may buy or sell MOF securities at par (i.e. at issued interest rate).

The above instruments are not adequate for the development of an efficient market oriented financial sector. In particular, they are not adequate or appropriate for developing an efficient and liquid market in government securities or for conducting a market based monetary policy. While the new FX auctions are well designed and are functioning satisfactorily, the other instruments are being redesigned. The reserve requirement does not provide banks with a useful liquidity management tool and would have complicated the implementation of a monetary target. It also includes a government

securities requirement that should not be part of the requirement. The various lending facilities are not very transparent and do not always serve policy objectives. The MOF securities window provides much needed liquidity to MOF securities, but under terms that undercut the development of secondary trading and of an interbank market. Furthermore, the MOF securities window deprives the CBI of one of its most important instruments of monetary control by leaving to banks the discretion to buy or sell MOF securities with the CBI.

Might just be my interpretation but if someone can decipher exactly the meaning behind this? I've highlighted the portion I'm questioning it almost sounds like a 90 day window for exchange? If anyone has any insight on this I'd appreciate it.

http://www.cbi.iq/documents/monetary_policy_en_f.pdf

Thanks,

V

[reigny]

Unless there's an addendum that was posted later, the first sentence says, "At its August 26 meeting, the Board of the Central Bank of Iraq (CBI) adopted a new Reserve Requirement regulation and a new Banking Facilities regulation." So if this is the case, then we're well past a 90 day window. That being said, it is *really* early, and I did skim the link, so it's possible I missed something. Interesting reading though...

[wbuse984]

A Discount Window for bills of exchange and similar bank paper with a maturity of less than 90 days and at least two endorsements (currently charging 11% for good quality paper)

Believe that the bills of exchange is a separate article in the sentence from the bank paper article (or bills of exchange may not refer at all to exchange of currency)...Looks to be regarding bank-to-bank transfers which is separate from exchanging currencies regarding us...JMHO...

[Maynard57]

A bill of exchange is a bank draft or a personal check.

[Chief V]

K Thanks! Not a whiz at Bank Lingo and I know we've got several Bankers and Bank Employees in here, just needed some clarification.

Thank you again folks,

V