Tension on the Czech money market has eased over the past week and market-making on the bond market could resume soon, central bank Vice-Governor Miroslav Singer said on Wednesday.
Singer said there was still nervousness on the market but that banks had been asking for fewer banknotes, have more liquid assets than at the beginning of the month and that there had been no outflow of deposits from the system. He added the central bank could take over the market-making role for the government bond market but added he hoped that would not be necessary. “The market is calming down,” Singer told the Reuters Central European Investment Summit in Vienna when asked about the money market. “We had some tension on the market last week; we also noticed that banks were hoarding cash, plain cash, in banknotes.” “The tension obviously eased ... deposits are growing again, at a normal pace, and the banks are asking us for much less cash than last week.”
He said banks were only lending for the short-term, but that in general the domestic banking system had a systemic surplus of liquidity and high deposits, which banks use for financing rather than the money market. “Banks definitely have on aggregate much more fast (easily) liquid assets, treasuries and similar instruments, than at the beginning of October,” he said, adding liquid assets had grown by about 10%.
Czech banks have not been exposed to the toxic assets at the heart of the global credit crunch to any large extent and no financial institution has been in trouble during the crisis. But the stock market has been battered, the crown currency has slipped, while the government has been forced to cancel bond auctions and market making on the bond market has seized up.
Market-making is when a bank maintains a firm bid and ask price for bonds by standing ready, willing, and able to buy or sell at publicly quoted prices. Singer said he had expected the bank’s new repo facility -- which offers to lend to banks against state bonds in order to restart standard bond market operation -- to attract more interest. “I myself expected higher volumes,” he said. “It seems that market making is not being restored. Trading with bonds exists over the phone.” “Traders are afraid that foreign entities might liquidate, because of cash needs, big portfolios of Czech bonds.”
The bank has lent just 9.8 billion Czech koruna ($484 million) in four repos over the past week, just a fraction of the roughly 350 billion that it sterilizes in standard repo operations. Singer said that kick-starting the market by starting market making itself, possibly through the Prague Stocks Exchange’s SPAD stock trading system. “We hope we will not have to do this,” he said. He added that it seemed there was some development and the market may unfreeze the market relatively soon. (Reuters)