Interbank markets and the Role of Central
Interbank markets and the Role of Central
Banks
Banks
Prepared By: Tilahu n Girma, January 2025
Prepared by: Tilahun Girma
Ango
Date: January 20th 2025
CamScanner
Objective of
the Understand Key
Presentation Concepts of interbank
Markets
Explore Central Bank
Roles and Policies
Interbank Lending and
Borrowing
Definition: Short-term lending and borrowing
between banks to manage liquidity.
Purpose: Ensures banks meet reserve requirements
and maintain financial stability.
Impact: Supports monetary policy transmission and
efficient functioning of financial markets.
Importance of Interbank
Markets
Facilitates efficient allocation of funds among banks.
Supports monetary policy implementation.
Provides Short-term funding solutions and enhances
market liquidity.
NBE'S Interbank Money Market
Directive
NBE has recently issued an amended directive No.
MFAD/IBM/03/2024 entitled "Interbank Money
Market"
Purpose:
- Banks utilize and manage effectively their funding
and liquidity demand using the existing liquidity in the
banking sector
- Commercial Banks manage their funding and
liquidity through borrowing and lending from and to
each other
NBE'S Internbank Money
Market Direcive
NBE wants to deepen interbank money market to
enhance intermediation process in the maket.
All commercial banks that maintain a reserve
requirement with the NBE are eligible to participate in
the interbank money market
The interbank money market trading hours run from
8:30 to 4:00daily from Monday to Friday except for
public holidays
NBE'S Interbank Money Market
Directive – Quotes and Trading
A liquidity-surplus Market participant shall publish its
quote to the electronic trading platform (Dealing
Platform).
The liquidity-deficient market participants shall use
the same platform to find the cheapest financial
source available in the market
The amount available for interbank lending, interest
rate as well as tenor for lending should be published.
Trading platform approved by NBE shall be used by
market participants. (Currenty ESX is approved)
NBE'S Interbank Money Market
Directive – Quotes and Trading
Minimum amount of per deal in the interbank market
is Birr 25 million
Market participants shall quote overnight or seven
days tenors.
Adeal shall be confirmed and settled when the
amount and interest rate are agreed upon by both
parties
NBE'S Interbank Money Market
Directive – Loan Repayment
The CSD system shall generate payment instruction
slips with repayment details to RTGS account at NBE
using SWIFT format message
At maturity date the amount borrowed plus interest
shall be credited to Lender's fund account maintained
at NBE through RGTS.
NBE'S Interbank Money Market
Directive – Collateral
The value of eligible assets provided as collateral
shall fully cover the loan granted plus a haircut,
interest payable and other related payments.
Eligible collateral shall be government securities,
NBE securities, and DBE bonds.
LIBOR and SOFR:
Understanding Benchmark
Rates
LIBOR (London Interbank Offered Rate):
Historically used for setting interest rates on loans
SOFR (Secured Overnight Financing Rate):
Newer benchmark based on U.S. Treasury Repo
transactions
Transaction Importance: Enhances transparency
and reduces manipulation risks in financial markets.
Transition from LIBOR to SOFR
LIBOR Challenges: Subject to manipulation and
reduced transaction volume.
SOFR Advantages: Based on actual transactions,
offering greater reliability
Global Impact: Requires updating financil contract
and systems globally.
Central Banks: Functions and
Policies
Central Banks: Functions and
Policies
Key Functions:
- Issuing Currency and managing reserves.
- Regulating financial institutions.
Policies:
- Inflation targeting, interest rate setting, and, liquidity
management.
Monetary Policy Tools
Interest Rates:
- Adjusting to influence borrowing and spending.
Open Market Operations /OMO/:
- Buying or selling securities to control money supply.
Reserve Requirements: Ensuring stability in the
banking system.
NBE's new monetary policy
framework – Open Market
Operation/OMO/
NBE is moving to an interest-rate based monetary
policy regime (Called NBR)
NBR – Primary means of signalling its policy stance
and influencing broader menetary and credit
conditions.
NBE is setting the initial policy interest rate at
15% (CBR/NBR)
Primariy Goal:
- Ensuring low and stable inflation
NBE's new monetary policy
framework
NBE has already started conducting monetary policy
related auctions every two weeks
It will either withdraw or supply liquidity to the
banking system
Managing Liquidity in Financial
Systems
Importance:
- Ensures Smooth functioning of payment and credit
systems.
Tools:
- Repo markets, discount windows, and liquidity
buffers.
Challenges: Addressing sudden liquidity shortages
and avoiding systemic risks
Central Banks and Economic
Growth
Promoting Price stability:
Ensuring low and stable inflation rates.
Suporting Employment:
- Balancing policies to encourage job creation
Encouraging investments:
- Stable financil conditions attract domestic and
foreign investments.
Challenges in Monetary Policy
Implementation
External factors:
- Global financial shoks and currency fluctuations.
Coordination issues:
- Aligning monetary and fiscal policies
Communication:
- Effectively managing market expectaions
