26 April 1999
The Reserve Bank has previously put on record that there is no reason for people to take their savings out of banks, but if they do so, the banking sector will cope.
Reserve Bank Deputy Governor Rod Carr said today: "If there is an irrational and extreme demand for cash in the last few weeks of 1999, the Reserve Bank will ensure that there are enough bank notes. In addition, I can announce today that the Reserve Bank will lend, unsecured if necessary, the banks the money to buy those additional bank notes."
Details of these contingency plans to provide credit are attached.
"Releasing these plans provides certainty to the banks and their customers about how the situation will be handled later in the year. The fact that we will be willing to lend unsecured to the banking system is a clear sign of the Reserve Bank's confidence in the soundness of the New Zealand banking system in the Y2000 period," Dr Carr concluded.
For further information contact
Corporate Affairs Manager
Phone 04 471 3671, home 04 938 8177, pager 026 105 085,
E mail Jackmanp@rbnz.govt.nz
Reserve Bank of New Zealand Information Release
Y2000 Liquidity Support Arrangements
On 25 February 1999, the Reserve Bank issued a news release on Y2000 and the banking system. Amongst the messages included in that news release were:
This information release sets out the contingency arrangements that the Reserve Bank will put in place to inject liquidity in the event of a large scale run to cash around the end of the year.
The Reserve Bank's policy priority is to manage liquidity to avoid either disruptions to the availability/cost of credit to the economy throughout this year (as banks anticipate the possibility of extra cash demands), or major disruption or market dislocation around the end of the year.
Our plans adopt an aggressive pre-commitment to the provision of ample additional liquidity. This pro-active approach should provide clear assurance to banks that ample central bank liquidity will be readily available at fair prices, and that large balance sheet adjustments in anticipation of end-of-year pressures are neither required nor warranted.
These contingency plans are not based on forecasts of what will, in fact, happen to currency demand. Rather they recognise that sensible planning by both banks and the Reserve Bank should take account of the improbable but possible event of a serious increase in currency demand.
Accordingly, our plans contain the following key features.
1 We will use foreign exchange swaps to build up a larger buffer of settlement cash. Foreign exchange swaps allow us to inject liquidity without taking securities out of the domestic market. To avoid potential year-end disruption, we envisage using foreign exchange swaps to inject liquidity in early December, even before any abnormal note demand is likely to become apparent. This may involve allowing settlement account balances to rise by $200-$300 million.
2 We will accept bank paper. From around the start of December until mid-January we will also be willing to accept (two name) bank paper in our Open Market Operations (OMOs) and overnight repos, up to $100 million per registered bank (or 25 per cent of Tier One capital, whichever is smaller).
3 We will adjust our interest rates to avoid penalising banks. In the context of the build up in settlement cash balances, we envisage adjusting the interest rate offered on settlement cash from 25 basis points under the Official Cash Rate (OCR) to 10 basis points under. Should significant overnight repos be required, the repo rate would also be adjusted, from 25 basis points to 10 basis points above the OCR.
4 If necessary, to avoid excessive pressure on collateral we will lend unsecured. If currency demand rises more than say, $500 million, above normal seasonal levels, and there are signs of pressure on collateral, we would make available unsecured overdrafts (initially to note-purchasing retail banks only) as required to meet liquidity demand. The minimum interest rate on actual drawings would be 15 basis points above the repo rate. At the same time, we would double the OMO bank paper limits noted above.
5 We will be seeking feedback from banks on the operational modalities of providing this sort of liquidity support.
At a general level, our liquidity injection operations through the period of any increase in note demand will work on the assumption that notes withdrawn in December will not find their way back into the banks until after the New Year. To minimise the need to rollover liquidity support, maturity dates for injections will typically be placed around mid January. To the extent that cash comes back faster than expected, aggregate settlement cash balances may be allowed to rise substantially for a few days.
This package is about providing reassurance to banks about the impact of a note run, and signalling the strength of our commitment to ensuring that liquidity provision is not a constraint. However, December/January can still throw up surprises. We will be monitoring events very closely - including the functioning of the interbank money markets - and would be ready to move earlier or more aggressively if necessary.
These contingency plans are to be discussed at a meeting between the Reserve Bank and representatives of financial institutions that the Bank deals with in its liquidity management operations. Should material modifications to the plan be called for, the Bank will advise.
For further information, please contact:
(04) 471 3739
Manager, Monetary Policy Implementation
(04) 471 3817
Manager, Monetary Policy Implementation
(04) 471 3968
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