CNB adjusts market-support operations introduced during crisis
The Bank Board of the Czech National Bank has decided to adjust the extraordinary liquidity-providing monetary measures introduced in October 2008 to support the domestic financial market during the global financial crisis. Under the approved changes, which reflect current market conditions, the three-month liquidity-providing repo operations will be discontinued at the end of 2010. The two-week liquidity-providing repo operations will be conducted less frequently (once a week) as from January 2011.
The Bank Board has decided that the two-week liquidity-providing repo operations will remain in place at least until the end of 2011. According to a CNB survey, banks agree that these extraordinary operations have been effective. The operations have been used in only very small volumes, but the very fact that investors and market makers can use them increases liquidity and improves the functioning of the government bond market.
As in the case of repo operations, the Bank Board has shortened to 14 days the maturity of the foreign exchange swaps that are used to provide koruna liquidity against the euro.
Exchange of collateral remains one of the CNB’s instruments and from now on will be regarded as a standard operation. The CNB had already intended to introduce this measure before the crisis, as it eliminates the inefficiency of securities settlement systems and gives banks access to sufficient securities to draw on intraday credit.
“The measures to support the interbank market introduced in October 2008 have proven successful. In line with the original objective, they have helped to stabilise the government bond market and thereby prevent problems in foreign financial markets from spreading to the Czech financial sector,” said Kamil Janáček, member of the Bank Board overseeing the CNB’s Financial Markets Department.
“Since these extraordinary operations were introduced, conditions have improved somewhat on the domestic market, allowing us to adjust their parameters,” he added. The CNB reserves the option to adjust the parameters further in response to market developments.
The technical parameters of the extraordinary interbank market support operations will change as follows as from January 2011:
|Adjustment of two-week liquidity-providing repo operations||until 31 December 2010||from 1 January 2011|
|Frequency of repo operation:||twice a week (Monday and Friday)||once a week (Monday)|
|Banks’ bids satisfied at fixed rate:||2W repo rate + 10 b.p.||2W repo rate + 10 b.p.|
Note: The remaining parameters of liquidity-providing repo operations remain unchanged.
|Adjustment of foreign exchange swaps||until 31 December 2010||from 1 January 2011|
|Maximum maturity:||three months||two weeks|
Note: Foreign exchange swaps are conducted on the basis of a bank’s request for the provision of koruna liquidity against the euro. For the purposes of the swap, the exchange rate is lowered by 5% to eliminate exchange rate risk. The other parameters (e.g. delivery after delivery settlement) remain unchanged.
Exchange of collateral (from now on a standard operation):
On request, the CNB exchanges collateral settled in the Central Securities Depository for collateral settled in the Short-Term Bond System (SKD). The aim is to provide banks with enough securities, for example for drawing on intraday credit. The CNB does not regard exchange of collateral as a classical monetary operation; rather, it is a technical operation aimed at eliminating malfunctioning of settlement in the Central Securities Depository for the purposes of drawing on intraday credit.