CBN sets N15b clearing benchmark for ‘Settlement Banks’

By Collins Nweze
In Nigeria
Mar 25th, 2014
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Settlement banks are to provide collateral of not less than N15 billion worth of treasury bills for clearing, the Central Bank of Nigeria (CBN) has said.

A settlement bank maintains accounts for clearing and those of other clearing members.

This is contained in the CBN’s Monetary, Credit, Foreign Trade and Exchange Policy Guidelines for 2014/2015. Part of the policy also states that a settlement bank must develop and implement a risk-based pricing model. It must also offer agency facilities to other banks for their clearing.

“Banks that meet the specified criteria shall continue to be designated as ‘settlement banks.’ Consequently, non-settlement banks, called ‘clearing banks’ shall continue to carry out clearing through the settlement banks under agency arrangement. The terms of the arrangements shall be mutually agreed between the settlement banks and the clearing banks,” the CBN said.

The apex bank said it would adopt the risk-based supervision (RBS) approach in supervising institutions under its purview.

“The objective of the RBS approach, is to provide an effective process to assess the safety and soundness of banks and other financial institutions. This is achieved by evaluating their risk profile, financial condition, risk management practices and compliance with applicable laws and regulations,” it added.

It enjoined banks to pursue profitability in their business models through efficient operations, adding that they should charge competitive, rather than excessive rates of interest in their transactions. The lenders are also to disclose their prime and maximum lending rates as fixed-spreads over the Monetary Policy Rate.

According to the CBN, Open Market Operations (OMO) auctions will continue as the major tool for liquidity management. OMO is an activity of the CBN that entails buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.

The CBN said the conduct of OMO will be discretionary and will involve the sale, or purchase of Treasury Bills and CBN Bills through appropriate market mechanisms that would include auctions and two-way quote trading.

It said the securities will be of specified tenor and volume, linked to assessed liquidity conditions in the banking system. Participants at OMO auctions would be the authorised Money Market Dealers (MMDs) comprising commercial and merchant banks, non-interest financial institutions and discount houses.

Also, based on market liquidity conditions and the subsisting Monetary Policy Rate (MPR), OMO will be complemented by repurchase agreements (repo/reverse repo), at the applicable rates.

The CBN said commercial and merchant banks would maintain a minimum Liquidity Ratio (LR) of 30 per cent and 20 per cent. Discount houses would invest at least 60 per cent of their borrowings in government securities while the ratio of individual bank loans to deposits, is retained at 80 per cent.

It said the discount window at the CBN be available to give authorised dealers access to effective management of their temporary liquidity shortages or surpluses.

Thus, standing facilities would continue to be open to them on overnight basis in line with subsisting guidelines. The facilities would be in the form of Standing Lending Facility (SLF); to address temporary shortfalls in liquidity, and Standing Deposit Facility (SDF) to aid effective management of short-term liquidity surpluses.

The CBN would determine the applicable interest rates on the facilities would be determined by the from time to time. It would also allow outright rediscounting of eligible securities at the discount window promptly, and at rates it considers appropriate.

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