Treasury gave Reserve Bank of Zimbabwe (RBZ) US$7 million for banks to access in the event of short term liquidity mismatches. “As the lender of last resort, we operate on the basis of actual approaches from banks themselves. So far banks have not been keen due to the very limited nature of the fund, as well as the current format of collateral requirements,” Gono said.
The lender of last resort role was revived in February this year after RBZ got funding from Treasury. The central bank had last performed that role in 2008 leaving banks vulnerable in the event of problems in the sector.
Under the current dispensation, banks are supposed to use Deeds of Transfer on immovable property as security and the industry has been lobbying treasury to introduce treasury bills which are easily tradable and are a widely accepted form of security throughout the world.
In the event of liquidity mismatches, banks are supposed to seek accommodation from the central bank. They have to pledge security to access the funds.
Gono told Standardbusiness the issue of funds and collateral would be addressed in due course by the bank in consultation with treasury.
The disadvantage of using Deeds of Transfer on immovable property as collateral is that it has inherent costs relating to perfection which involves bond evaluation and registration.
Bankers Association of Zimbabwe president John Mushayavanhu said on Thursday the industry was in discussions with the ministry of Finance and hopes its proposal for the reintroduction of treasury bills would be included when Finance minister Tendai Biti unveils the 2012 national budget this week.
In his mid-term monetary policy statement, Gono said the limited fund and its complicated collateral had seen banks being more prudent by keeping unnecessarily large balances of liquid assets in cash, especially given that most of their liabilities are demand deposits.
Under normal circumstances, banks keep liquid assets in a combination of cash as well as short-term liquid and tradable instruments such as treasury bills.
However, the absence of tradable securities means that balances in Real Time Gross Settlement would be higher.
However, the absence of treasury bills on the market means that liquidity will remain constrained and this effectively kills a vibrant secondary market of trading financial instruments, which is a critical source of revenue and liquidity for the sector.
Treaury bills are short-term securities pu-rchased for a price that is less than their face value. When they mature, the government pays the holder the full face value.
In developed financial markets, banks diversify their risks by investing in treasury bills and municipal bonds among others thereby stimulating various investment avenues for the economy.
Currently in Zimbabwe, banks are by default only investing in loan assets in the absence of treasury bills and other quasi-government bonds. This effectively increases concentration risk in one asset class and in turn can cause systemic risks if some of the loans being created by banks do not perform.
In his mid-term monetary policy statement, Gono said RBZ was mulling introducing market stabilisation bills to resuscitate the money market and ensure the lender of last resort facility is sufficiently enhanced.
Gono told Standardbusiness on Thursday work on the reactivation of the money market is still ongoing and the market would be advised once firm structures are in place.