Unlimited amount of long-term liquidity available at fixed interest ratesPrint
24 March 2020
To ease strains in funding markets caused by the coronavirus pandemic, the Magyar Nemzeti Bank decided to take further liquidity measures. In line with the decisions made by the Monetary Council today, the Bank will introduce a long-term, i.e. three, six and twelve-month and three and five-year, collateralised lending facility of unlimited total amount at fixed interest rates, and, by suspending the sanctions on reserve deficiency, it will exempt banks from complying with reserve requirements. Complementing the steps taken earlier, in particular the expansion of the range of collateral with loans to large companies and changes to the terms of swap tenders, the two measures are expected to significantly strengthen banks’ liquidity position. The MNB will hold the first tender of long-term loans on Wednesday. Exemption from reserve requirements takes immediate effect.
In implementing its monetary policy, the MNB will provide liquidity to banks in the form of collateralised lending, whereby the pool of eligible securities pledged to the MNB by the counterparty bank and, from Monday onwards, loans to large companies meeting the requirements set out in the Terms and Conditions will serve as collateral. Currently, the MNB has two active lending facilities: overnight and one-week loans. The Bank will provide liquidity to commercial banks with unlimited availability as a standing facility by offering overnight lending at the top of the interest rate corridor, i.e. at the 0.9 per cent base rate, depending on the amount of eligible collateral submitted by the banks. The one-week lending facility, announced weekly on Wednesdays, will also be available at the 0.9 per cent base rate, where the MNB will make a decision with regards to satisfying banks’ needs depending on market developments and demand by banks. With today’s decision by the Monetary Council, the Bank seeks to complement its tools with longer-term instruments.
The long-term lending facility will be offered to banks by the MNB with five maturities: three, six and twelve months and three and five years, adjusted to the preferred maturities in the market. The long-term loan instrument has a fixed rate, i.e. banks will pay the interest defined upon announcement of the tender to the MNB over the entire maturity. The Bank will define the interest rate of the instrument at each tender; however, the interest rate may not be lower than the base rate prevailing at the time of the tender. There is an unlimited total amount assigned to the programme. However, the MNB will set the amounts it accepts at specific tenders taking into account current market developments to manage liquidity effectively. The long-term collateralised loan instrument is a reliable source of funding with fixed interest rate for banks. It supports liquidity of the relevant credit markets (corporate and household loan markets) and the key financial markets (foreign exchange and interest rate swap markets, government securities market, interbank market), helps mitigate financial market turbulence and promotes the stability of the financing environment.
In line with the MNB Act, the Bank will offer long-term lending against collateral; however, the amount of collateral available in the banking system is large. The adjusted market value of eligible, uncommitted securities not used as collateral, which may be available for use in central bank credit operations, is currently over HUF 9,600 billion. Within this, the amount of securities which may be freely involved is over HUF 7,000 billion, and loans to large corporations following the expansion of the range of collateral account for HUF 2,600 billion.
In addition to the introduction of a long-term lending facility, the Monetary Council also made a decision on the exemption from reserve requirements by suspending the sanctions on reserve deficiency. This measure will facilitate the management of liquidity for the banking system, providing liquidity of over HUF 250 billion. Banks will have free access to this amount: they may use it to fund the required amount of liquidity and they may use it for lending in the interbank market, thereby supporting the efficient redistribution of liquidity. In accordance with past practice, required reserves will continue to be remunerated at base rate. If, however, a bank keeps on its reserve account an amount lower than specified in the relevant central bank regulation, the MNB will no longer charge a penalty interest, i.e. banks will become exempt from the sanctions on reserve deficiency currently in effect. The exemption from the reserve requirements is effective immediately, i.e. it is applicable for the reserve maintenance period of March 2020.