Development of Money Markets

Transcription

1 Development of Money Markets Mats Filipsson International Monetary Fund Monetary and Exchange Affairs Department Workshop on Developing Government Bond Markets in APEC Economies Shanghai, November 12 15, 2002

2 Overview of Presentation Conditions for money market development Benefits of money markets Role of central bank in developing money markets Coordination between monetary operations and government cash management 2

3 Conditions for Money Market Development Conditions for developing a well-functioning money market: Banks and other financial institutions should be commercially motivated to respond to incentives to actively manage risk and maximize profits. Sound banks and other financial institutions. Shift from direct to indirect monetary policy instruments. Sound government cash management and coordination with central bank. 3

4 Benefits of Money Markets More effective monetary policy First step of transmission of monetary actions to economy Money market rates are a useful indicator of expectations regarding future monetary actions 4

5 Benefits of Money Markets Promote financial stability and development Financial institutions can cover their short-term liquidity needs Facilitate development of a liquid bond market Reason: Enable to obtain regular financing of bond inventories to carry out their market making function 5

6 Benefits of Money Markets Reduces cost of government financing Existence of liquid financial markets reduce risk of auction failure reduce borrowing costs 6

7 Role of the Central Bank Stability oriented monetary policy Liquidity management of central bank Central bank operating procedures affect the stability of the money market and incentives to use the money market to manage risk 7

8 Role of the Central Bank Standing facilities penalty rates should provide incentives for interbank activity wide enough corridor should encourage trading 8

9 Role of the Central Bank Open market operations foster the development of secondary markets in these papers CB bills can be a useful instrument when there is no working T-bill market or the CB is perceived more creditworthy than the govt. But: CB bills may result in market fragmentation foster collateralized money markets (repos, buy/sell backs) Need for coordination 9

10 Role of the Central Bank Reserve requirements Trading in overnight market will be determined by Length of reserve maintenance period Averaging provisions for meeting reserve requirements Penalties for accessing central bank lending and deposit facilities 10

11 Role of the Central Bank Importance of accurate liquidity forecasts Liquidity management decision are based on liquidity forecasts Help reduce volatility Items of the autonomous supply component that are most difficult to predict are govt. receipts and payments Coordination with government 11

12 Coordination between monetary operations and govt. cash management Government cash flows can be a major source of uncertainty in central bank liquidity management impact on the autonomous component of liquidity supply 12

13 Coordination between monetary operations and govt. cash management Need for sound management of govt. cash balances Effective information-sharing and coordination between CB, MoF, and debt managers is critical (see Guidelines for Public Debt Management) 13

14 Coordination between monetary operations and govt. cash management Ways of coordination CB acts as fiscal agent information of debt calendar is available. Govt. shares cash flow projections with CB on a daily basis and promptly informs about new information (liquidity forecasting committee can be useful). Uncertainty is reduced when overdraft is limited or prohibited and govt. deposits not held with CB (but: problem when banks are weak). 14

15 Summary Factors for money market development: Profit oriented and sound banks Monetary operations through market based instruments Incentive structure for interbank trading provided through CB s operating procedure Coordination between government cash management and monetary operations 15

16 Initial impact of Indirect Monetary Policy Instruments INTERBANK MARKET Funds held immediately prior to final settlement to enable banks to meet obligations to each other and to the central bank. Only institutions with accounts at the CB & the CB participate. Also called the clearing or settlement market. PRIMARY MARKET Initial sale of T-bills by the Government s agent, usually the CB. Sold by auction or tap issue. CALL MONEY MARKET Market for funds with overnight maturity. Transactions take place during the day. Banks and large organizations participate. TERM MONEY MARKET Market for funds with maturities >1 day and <1 year. Includes secondary market in T-bills & other paper. Banks & large financial organizations participate. FOREIGN EXCHANGE MARKET Liquidity of the Money Market affects the functioning of the Foreign Exchange Market. PRIMARY GOVERNMENT BOND MARKET Initial sale of government bonds by Government s agent, usually the CB. Sold by auction or tap issue. BOND MARKET Market for paper of over 1 year remaining to maturity. Banks and other financial and institutional investors participate. Money Market liquidity and stability affects the liquidity of the Bond Market. 16

17 Stylized balance sheet of the central bank Assets Net foreign assets (NFA) Net position of the govt. (NPG) Liabilities Currency (C) Bank reserves (R) Lending to banks (L) Other items net (OIN) Supply of bank reserves = NFA + NPG + OIN C + L Autonomous position Policy position 17