New Telegraph

Analysts: CBN’s special bills’ll improve banks’ liquidity ratios

PREDICTION
Lenders’ liquidity ratios already close to regulatory minimum of 30%

 

Deposit money banks (DMBs) in the country are likely to see an improvement in their liquidity ratios due to the Central Bank of Nigeria’s (CBN) introduction of Special Bills, analysts at FBNQuest Research have said.

 

The analysts, who made the prediction in a report obtained by New Telegraph yesterday, noted that the    apex bank’s introduction of the Special Bills was particularly significant as the liquidity ratios of lenders, especially Tier 2 banks, “are already close to the regulatory minimum of 30 per cent.”

 

In a move it said was part of measures to “deepen the financial markets and avail the monetary authority with an additional liquidity management too,” the CBN, had through a circular, last Wednesday, introduced Special Bills to the financial system.

According to the circular, key fea  tures of the bills include a tenor of 90 days, zero coupon, and applicable yield that will be determined by the CBN at issuance.

 

In addition, the bills will be tradable amongst banks, retail and institutional investors and also qualify as liquid assets in the computation of liquidity ratio for lenders. The statement further said that the bills would not be accepted for repurchase agreement transactions with the CBN and will not be discountable at the apex bank’s window.

In their reaction, FBNQuest Re search      feasearch analysts first highlighted what they described as “positives” of the CBN’s announcement.
They stated: “A boost to banks’ liquidity ratio. Prior to the circular, excess Cash Reserve Requirement (CRR) had been sterilised with the CBN on a nil return basis. Most banks have CRRs north of 40 per cent vs. the regulatory minimum of 27.5 per cent.

 

“Going forward, the excess CRRs will be eligible for conversion into the special bills and used in the computation of liquidity ratio. As such, banks will see an improvement in their liquidity ratio. This is quite significant, particularly for Tier 2 banks because their liquidity ratios are already close to the regulatory minimum of 30 per cent. Also, although the yield has not been determined by the CBN, the circular indicates that banks will be able to earn some return on the bills as opposed to the zero yields on their excess CRR.”

 

However, the analysts also pointed out that the policy had its “negatives.”
As they put it, “the CBN’s press release mentions a 90-day tenor. However, we understand that the CBN has the discretion to roll the bills over with a view to extending its maturity. It appears that this clause is meant to address concerns around the impact of the potential excess liquidity on fx/exchange rate stability.

 

Consequently, its utility for immediate risk asset creation is limited. Given this caveat, the bills may not be as liquid an asset as they appear initially.”

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