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14 banks on edge over new cash reserve policy
About 14 banks may have landed at the receiving end of the Cash Reserve Requirement, CRR, harmonisation policy announced last week by the Monetary Policy Committee, MPC, of Central Bank of Nigeria, CBN.
About nine banks are benefiting from the policy change.
CRR simply specifies the proportion of a bank’s deposit that must be reserved, thus specifying the limit of cash banks can lend out of its total deposits.
For this purpose banks’ deposits are divided into public sector and private sector with 75 percent reserve imposed on public sector deposits, while 20 percent was imposed on private sector deposits up until last week.
However, MPC rose from its second quarter meeting last Tuesday harmonising the two by crashing public sector CRR to 31 percent, while hiking the private sector CRR to same level.
Effectively the decision threw most banks that do not have substantial public sector deposits into difficult liquidity position, while also giving broader resources to others with big public sector deposits.
Our investigations show that the five banks usually categorised as systemically important banks, SBIs, in addition to four others are the major beneficiaries of the policy.
At the backdrop of deep concern about the state of the global and domestic economy, lower level of external reserves buffer, surging inflation and the fact that monetary policy is gradually approaching the limits of tightening, last week’s MPC had retained its policy stance on MPR (13%), exchange rate and liquidity ratio (30%), stating that additional tightening measures may not be appropriate now to avoid overheating the economy.
Banking industry analysts believed that in a bid to check moral hazard by private market participants given the current discriminatory CRR on public and private sector deposits, MPC took the decision to harmonise the CRR on public and private sector deposits.
Moreover, CBN sources indicated that the committee also envisaged that a relaxing effect of the harmonisation would be a release of about N500 billion hitherto reserved under the previous CRR for public sector funds into the economy, which would have a salutary effect in the macro-economy environment.
However, it was not clear if the apex bank took into consideration the consequence of the harmonisation on the health of the less-privileged banks as these banks have become embattled with squeezing liquidity since last week.
Experts’ views
Analysing the emerging scenario Afrinvest, a Lagos-based investment bank outfit said: “Although we initially considered MPC’s move to be strategic easing, further examination of CBN’s data as at end-April (2015), however, indicated that CRR consolidation to 31 percent actually lead to a net outflow of liquidity from system with varying impact across banks.
“Banks with more exposure to public sector deposit may benefit from CRR crediting, while banks over-weighted on private sector deposit will face further tightening pressure.
“While the MPC’s decision was borne out of the need to engender overall stability of the banking system, with reluctance for further tightening, the decision of the monetary policy committee on CRR may have resulted in an unintended tightening in our view.”
Reacting to the development, the Chief Executive of Financial Market Dealers Association, the umbrella body of banks’ chief financial strategists, Mr. Wale Abe, told Vanguard that while the policy may have some unintended outcome, the overall picture was positive given that CBN has a broader view and more information on the economy at large.
Out of the N500 billion expected to have been freed by the new policy, the nine benefiting banks control over N450 billion, while the remaining 14 banks share the balance of less than N50 billion.
About nine banks are benefiting from the policy change.
CRR simply specifies the proportion of a bank’s deposit that must be reserved, thus specifying the limit of cash banks can lend out of its total deposits.
For this purpose banks’ deposits are divided into public sector and private sector with 75 percent reserve imposed on public sector deposits, while 20 percent was imposed on private sector deposits up until last week.
However, MPC rose from its second quarter meeting last Tuesday harmonising the two by crashing public sector CRR to 31 percent, while hiking the private sector CRR to same level.
Effectively the decision threw most banks that do not have substantial public sector deposits into difficult liquidity position, while also giving broader resources to others with big public sector deposits.
Our investigations show that the five banks usually categorised as systemically important banks, SBIs, in addition to four others are the major beneficiaries of the policy.
At the backdrop of deep concern about the state of the global and domestic economy, lower level of external reserves buffer, surging inflation and the fact that monetary policy is gradually approaching the limits of tightening, last week’s MPC had retained its policy stance on MPR (13%), exchange rate and liquidity ratio (30%), stating that additional tightening measures may not be appropriate now to avoid overheating the economy.
Banking industry analysts believed that in a bid to check moral hazard by private market participants given the current discriminatory CRR on public and private sector deposits, MPC took the decision to harmonise the CRR on public and private sector deposits.
Moreover, CBN sources indicated that the committee also envisaged that a relaxing effect of the harmonisation would be a release of about N500 billion hitherto reserved under the previous CRR for public sector funds into the economy, which would have a salutary effect in the macro-economy environment.
However, it was not clear if the apex bank took into consideration the consequence of the harmonisation on the health of the less-privileged banks as these banks have become embattled with squeezing liquidity since last week.
Experts’ views
Analysing the emerging scenario Afrinvest, a Lagos-based investment bank outfit said: “Although we initially considered MPC’s move to be strategic easing, further examination of CBN’s data as at end-April (2015), however, indicated that CRR consolidation to 31 percent actually lead to a net outflow of liquidity from system with varying impact across banks.
“Banks with more exposure to public sector deposit may benefit from CRR crediting, while banks over-weighted on private sector deposit will face further tightening pressure.
“While the MPC’s decision was borne out of the need to engender overall stability of the banking system, with reluctance for further tightening, the decision of the monetary policy committee on CRR may have resulted in an unintended tightening in our view.”
Reacting to the development, the Chief Executive of Financial Market Dealers Association, the umbrella body of banks’ chief financial strategists, Mr. Wale Abe, told Vanguard that while the policy may have some unintended outcome, the overall picture was positive given that CBN has a broader view and more information on the economy at large.
Out of the N500 billion expected to have been freed by the new policy, the nine benefiting banks control over N450 billion, while the remaining 14 banks share the balance of less than N50 billion.
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