By Omoh Gabriel
The Central Bank of Nigeria has said that banks found to be involved in unwholesome asset trading will be denied access to the recently introduced discount window opened to assist banks that may run into financial crisis as a result of the global financial melt down. The CBN in the wake of the global financial melt down expanded its discount window to give life line to banks that may be facing cash flow problems by buying some of their financial instruments a little lower than their face value.
The apex bank in its guide line to the operation of the ‚Äúdiscount window‚Äù said that the facility is to be approached by banks ‚Äúon a last resort basis only‚Äù that is when all other sources of raising money has failed.
Giving conditions in which a bank or a discount house could be denied access to the facility the CBN stated ‚ÄúIn particular, institutions may be denied access to the Discount Window in the following circumstances: if the Bank observes an act of undue rate arbitrage in the operations of the institution‚Äôs dealings; if an institution is found to have contravened the provisions of the Bank‚Äôs monetary and credit policy guidelines; if the Bank discovers that the institution has been over-trading or engaged in undue mismatch of its assets and liabilities; if there is contravention of the clearing houses rules; if there is any contravention or non-observance of provisions of the prudential guidelines; and If a bank or a discount house under a holding action fails to comply with the provisions of the holding action‚Äù.
According to the guideline ‚ÄúAll banks and discount houses shall have direct access to the facility but the CBN ‚Äúthrough its Banking Operations Department shall exercise good judgment and discretion in the administration of the ‚ÄúDiscount Window‚Äù in order to ensure that its objectives are met‚Äù.
The CBN further said ‚ÄúDeposit Money Banks and Discount Houses shall access the Discount Window only on secured basis. Any credit must therefore be fully and adequately collateralised by eligible securities instruments which the CBN listed as Nigerian Treasury Bills; Nigerian Treasury Certificates; FGN Bonds; NDIC Accommodation Bills; States Government Bonds; Banker‚Äôs Acceptances/Guaranteed Commercial Papers/Promissory Notes.
According to the apex bank ‚ÄúDeposit Money Banks and Discount Houses may use the ‚ÄúWindow‚Äù to obtain liquidity from the CBN via The sale of securities for immediate payment and the commitment by seller to buy back the securities at a later date under an agreed term or collateralized loans against eligible instruments. Such ‚ÄúRepo‚Äù credit from the ‚ÄúWindow‚Äù shall be for a period not exceeding one year. Collateralised loans shall be on an overnight basis through standing lending facilities. Credits at the DW must be with eligible instruments whose tenor shall not exceed one year. In other words, such instruments shall be those qualifying for secondary market operations with the CBN. Credits by way of an advance or outright borrowing must be fully secured by eligible instruments.
The eligible instruments at the DW will be rated appropriately and in line with the
prevailing economic conditions and the financial well being of the issuer of the
‚ÄúAdvances or outright borrowing at the DW whilst adequately secured shall be priced
appropriately and the applicable rate of interest will be governed by the prevailing
economic and market conditions. In any event, such advances shall attract a rate of
interest at the Bank‚Äôs MPR plus a margin determined at the discretion of the CBN.
Any other instrument that may be approved by the CBN from time to time.
‚ÄúThe first three instruments are securities issued by the Federal Government of Nigeria,
while the others are the non-federal government securities. It must be noted that not all non federal government instruments will have automatic eligibility at the DW. The Bank will
maintain a list of the eligible instruments for DW operations. DMBs/DHs will be required to satisfy certain prescribed conditions as contained in the Annexure to this paper, in order to have eligibility conferred on their instruments. Consideration for applications from prospective eligible authorized dealers will be open-ended.
‚ÄúThis Guideline is issued by the Central Bank of Nigeria (CBN) in exercise of its statutory
powers under section 30 of the CBN Act 2007.
Under the Guidelines, the Bank hereby expands its discount window operations in order
to allow more robust processes of injection and absorption of excess liquidity in the
money market. The expanded discount window is introduced to admit non-federal government instruments as eligible securities. It is also to ensure that the tenor of liquidity provided under the discount window operations is extended from overnight to maturities of up to 360 days‚Äù.
It said ‚ÄúFollowing the liberalization of the financial markets and the need to deepen the
securities market, the Central Bank of Nigeria in exercise of its statutory powers hereby
expands the Bank‚Äôs Discount Window operations. This is through the admittance of non federal government instruments. It also involves extending the tenor of liquidity provided
through the discount window from overnight to maturities of up to 360 days. These additional initiatives are expected to engender a more efficient and effective financial resource flows and intermediation. However, the basic policy thrust in the administration of the Discount Window (DW) would remain that of the Central Bank of Nigeria acting as a lender of last resort in relieving liquidity shortages and absorbing excess liquidity in the banking system.
The Central Bank of Nigeria (the Bank) recognizes that open market operations are the
primary means of effecting changes in the overall level of bank reserves and the interest rates in the inter-bank market. It will, therefore, continue to employ open market operations in the adjustment of reserves. Nevertheless, the DW is expected to serve as a supplementary adjustment mechanism, especially for the institutions which may be facing liquidity imbalances. It must be realized that access to the DW has the implication of creating reserves, and reserves should be created circumspectly if monetary control objectives are to be constantly placed in adequate perspective.