CBN to penalise banks with Liquidity problems

Ebun Francis

The Central Bank of Nigeria on Wednesday said it will penalise Deposit Money Banks that have liquidity challenges by way of temporary suspension from its lending window.

The apex bank announced the change in its rule of  engagement with commercial banks, through a circular which spelt out new rules regarding how financial institutions could borrow cash from fellow banks or the CBN to cover  temporary shortfalls.

Part of the circular, signed by Mr Alvan Ikoku, CBN’S Director of Financial market, entitled: ‘Amendment of S4 Business Rules and Guidelines, read, “With reference to Section 10.1 of the S4 Business Rules and Guidelines, which states among others that transaction with the CBN, any auction or two-way quote with the CBN must be settled. If it is in queue, it shall be given highest priority and when it fails to settle, the system shall generate an automatic Intra-day Liquidity Facility (ILF) backed by collateral to settle the transaction.

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“Where there are no securities, the allotment shall be cancelled and the defaulter suspended from all auctions for eight weeks, effective from the date of default.”

The circular further stated that, “The ILF shall be bought back or converted to Standing Lending Facility (SLF) by the participant by the close of business day, failing which it shall be automatically converted to SLF at the prevailing SLF rate plus 500 basis points.

“If any SLF is not purchased by the participant by the next business day, such participant shall not be eligible to access the CBN discount window until such outstanding obligation is settled in accordance with Section 27 of the Guidelines for the Conduct of Repurchase Transactions under the CBN Standing Facilities.

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“Henceforth, all SLF must be bought back latest by 10am on the maturity date, failing which encumbered securities would be automatically rediscounted.”

The S4 refers to the settlement platform created by the CBN for security settlement. In the new rules, the CBN is simply saying that any bank which fails to back up cash borrowed from it or other banks with adequate security will get penalised.

The new measure, experts say is to essentially help the regulator to identify banks that are having liquidity problems.