This post is more of an open discussion post. I want to know what YOU think about the new Reserve Bank liquidity measures.
We know that BNZ, Goldman Sacs, the Press, and fellow bloggers such as the Hive and Mish believe that this (and yesterdays financial market review) illustrates a significant change in stance by the Bank. However the Bank itself believes that this illustrates no change in stance, but is simply mean’t to keep our monetary policy practice in-line with other countries – in the words of CPW, they wish to sit at the big boys table.
My knowledge of such things is decidedly limited – however, I’ll tell you what I think they mean, then you can correct me 😉
The main changes according to the Bank are:
- Extension of the range of securities eligible for acceptance in the Reserve Bank’s domestic liquidity operations to include: NZ-registered NZ dollar AAA rated securities, including Residential Mortgage-backed securities, and AA rated NZ government sector debt – including Government agencies, SOEs and Local Authorities.
- The discount margin applied in the Bank’s Overnight Reverse Repo Facility will be 50 basis points for all eligible securities.
- A graduated ‘haircut’ regime will replace the existing limit structure for all securities eligible for domestic liquidity operations.
- Extension of Overnight Reverse Repo Facility from 1 day to a maximum of 30 days.
My impression of what these mean is as follows (aided in large parts by this).
The first change is to extend the number of securities that the Reserve Bank will accept as collateral for loaning out funds through the ORRF (overnight reverse repurchase facility). This should increase liquidity by allowing institutions to borrowed based on these illiquid assets. However, at a rate of OCR+50 basis points, and given the fact that liquidity in New Zealand is still relatively healthy this should have no real impact on the economy.
The second change is to introduce the +50 basis points rate on these new securities. I think that the old style securities (such as government back AAA debt) is still priced at OCR+25 basis points, I would like to be corrected if I am wrong though (Update: Supposedly they were lifting it to +50 anyways – so this is on all securities. In a sense it is no change).
The third change is a “haircut regime“. A haircut implies that the bank will only accept proportion of the asset as collateral when making a loan – where the proportion depends on the risk associated with the asset. As a result, the riskier the instrument used as collateral, the less you will be able to borrow with it. This seems fine, as it simply assumes that the RBNZ is taking into account risk when making loans.
The final change is relatively significant. The ORRF can now be used for a 30 days, rather than one day transactions. There are two possible reasons for this that I can tell:
- It is being made into an instrument that can help groups with relatively longer term liquidity problems (where longer term is a month),
- The fact that the new securities have to be processed manually implies that it is expensive and difficult to work with them on a daily basis – so the loans are allowed to be out for 30 days to reduce transaction costs.
Ultimately, I think the Reserve Bank introduced these measure in order to be prudent (insofar as further liquidity problems could appear) and consistent with international best policy. I believe them when they say that this will have no impact on the monetary policy settings – and as a result, I feel people are reading too much into what has happened here.
We have gone through the changes, and they don’t appear to be terribly significant given the current level of liquidity in the economy. Hopefully it will remain that way.
If people would like to add some points and clean up the technical details here, I will add some updates to this during the day as (if) comments come in.