Define the Money Market. Briefly describe the products of the money market. Or briefly describe money market instruments available in Bangladesh

 The money market refers to trading in very short-term debt investments, short-term debt instruments are traded on the money market. It involves an ongoing exchange of funds between businesses, governments, banks, and other financial institutions for terms that can range from one night to as long as a year.

The money market comprises banks and financial institutions as intermediaries, 20 of them are primary dealers in treasury securities. Interbank clean and repo-based lending, BB's repo, reverse repo auctions, BB bills auctions, and treasury bills auctions are primary operations in the money market, there is also active secondary trade in treasury bills (up to 1-year maturity).

 There are several different types of money market instruments that are traded in the money market. These are:

1. Certificate of deposit: It is a negotiable term deposit accepted by commercial banks. It is usually issued through a promissory note. CDs can be issued to individuals, corporations, trusts, etc. Also, the CDs can be issued by scheduled commercial banks at a discount. And the duration of these varies between 3 months to 1 year. The same, when issued by a financial institution, is issued for a minimum of 1 year and a maximum of 3 years. It functions similarly to a fixed deposit, but with better negotiating power and more flexible liquidity conditions.

2. Commercial Paper: Corporates issue CDs to meet their short-term working capital requirements. Hence serves as an alternative to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year. This money market product functions as a promissory note created by a business or organization to raise short-term capital. It is an unsecured instrument, meaning there is no connected collateral.

3. Treasury bills: Treasury Bills are one of the most popular money market instruments. They have varying short-term maturities it can only be issued by a nation's central government, when necessary, funds are needed to fulfill its immediate obligations. These do not pay interest but do allow for capital gains because they can be bought at a discount and paid in full when they mature. Due to the government's backing of Treasury Bills, there is very little risk.

4. Repurchase Agreements: Repurchase agreements are short-term borrowing instruments in which the issuer receiving the funds makes a promise to pay it back or repurchase it in the future. Government securities are typically traded under repurchase agreements.

5. Banker's Acceptance: In the financial industry, this popular money market product is exchanged. With a signed promise of future repayment, a loan is issued to the designated bank after a banker's acceptance. Bankers' acceptances (BAs) are financial instruments that arise out of commercial transactions and are essentially a guarantee by a bank to make payment.

6. Call Money: Call money refers to deposits or borrowings made overnight that mature automatically the next working day. It is a short-term loan that can be repaid immediately and is utilized for interbank trades. Call money is a crucial element of the money market. It has a number of unique qualities, including being a vehicle for managing funds for a very little period of time, an easy transaction to reverse, and a way to manage the balance sheet. Dealing in call money gives banks the chance to make interest on their excess cash.

7. Short Notice Money: It refers to transactions involving money that last longer than overnight but less than 14 days (maturity of 2 days to 14 days). Both call money and short notice money are short-term loans between financial institutions, hence they are comparable. Short notice loans are repaid up to 14 days after the lender gives notice

The interest rates in the market are market-driven and hence highly sensitive to demand and supply. Also, the interest rates have been known to fluctuate by a large % at certain times.

Briefly describe CRR and SLR in the context of Bangladesh. Why are they maintained? Or What are the current CRR and SLR for conventional banks and Islamic Banks?

 The cash reserve ratio (CRR) is the amount of money that the scheduled banks will have to have in deposit with the central bank of the country at all times. If the central bank raises its CRR, less money is available to banks. CRR is the amount the bank cannot be deposited anywhere or loaned to borrowers. All banks are obliged to keep their Cash balance with BB

In addition to monetary policy objectives, the BR can also determine processes for maintaining cash reserves, and currently, the required CRR is 4% for the bi-weekly average of gross demand and time Liabilities with a provision of at least 3.5% on a daily basis of the same Average of gross demand and time liabilities.

Every scheduled bank has to maintain a balance in cash with BB the amount of which shall not be less than such portion of its total demand and time liabilities as prescribed by BB from time to time, by notification in the official Gazette.

The Statutory Liquidity Ratio or SLR is the minimum deposit percentage a commercial bank must hold in the form of cash, gold, or other securities. It's actually a reserve obligation banks are expected to hold before granting credit to customers.

The Statutory Liquidity Requirement (SLR) is one of the quantitative and powerful tools of monetary control of the central banks. Changes in SLR can have a marked effect on the money and credit situation of a country. If the central bank raises the average reserve requirement of commercial banks, this would create a reserve deficiency or decrease in the available reserve of depository institutions. If the banks are unable to secure new reserves, they would be forced to contract both earnings and deposits which would result in a decline in the availability of credit and increase the market interest rates. The reverse would happen if the central bank lowers its reserve requirements.

At present, the required SLR is 13% daily for conventional banks and 5.5% daily for Islamic Shari'ah-based banks and Islamic Shari'ah-based banking or conventional banks of their average total demand and time liabilities. Banks are advised to follow the circular issued by the Monetary Policy Department of BB from time to time in this regard.

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are maintained in the banking sector to fulfill certain objectives and ensure the stability and soundness of the banking system. Here's an explanation of why CRR and SLR are maintained:

1. Cash Reserve Ratio (CRR): CRR is the portion of a bank's total deposits that it is required to hold in the form of cash reserves with the central bank. It is set by the central bank and serves the following purposes:

a. Control Money Supply: By adjusting the CRR, the central bank can influence the money supply in the economy. If the central bank wants to reduce liquidity or control inflation, it can increase the CRR, thereby reducing the funds available for lending by banks. On the other hand, if the central bank wants to stimulate economic growth, it can lower the CRR, increasing the availability of funds for lending.

b. Ensuring Solvency and Stability: Maintaining a certain level of cash reserves helps banks meet their withdrawal obligations to depositors. It acts as a safeguard against bank runs or sudden withdrawal demands, ensuring the solvency and stability of banks.

c. Monetary Policy Transmission: CRR plays a crucial role in the transmission of monetary policy. When the central bank adjusts the CRR, it affects the cost of funds for banks. If the CRR is increased, banks have to hold more funds as reserves, reducing the funds available for lending and potentially increasing lending rates. Conversely, a decrease in the CRR can lead to lower lending rates, stimulating borrowing and economic activity.

2. Statutory Liquidity Ratio (SLR): SLR is the portion of a bank's total deposits that it is required to maintain in the form of specified liquid assets, such as government securities, gold, or cash. Similar to CRR. SLR serves the following purposes:

a. Liquidity Management: SLR ensures that banks maintain a certain level of liquidity to meet their short-term obligations and unexpected liquidity demands. It acts as a buffer to handle unforeseen events and maintain the stability of the banking system.

b. Safety and Stability: By requiring banks to invest in safe and liquid assets, SLR ensures that banks have a cushion of assets that can be easily converted into cash if needed. This helps in mitigating liquidity risks and promoting financial stability.

c. Credit Flow Regulation: SLR also influences the credit flow in the economy. When banks invest a significant portion of their deposits in government securities to meet the SL.R requirement. it reduces the funds available for lending to the private sector. The central bank can adjust the SLR to control credit expansion or contraction, depending on the monetary policy goals.

Overall, CRR and SLR are regulatory measures that help maintain liquidity, stability, and control over the banking system. They provide a mechanism for the central bank to manage money supply, ensure solvency, and regulate credit flow in the economy.

What is SLR? Why and how is it maintained? Or what is the Statutory Liquidity Ratio (SLR) of a bank? How is it calculated?

 Statutory liquidity ratio or SLR is the minimum deposit percentage a commercial bank must have in the form of cash, gold, or other securities. It's actually a reserve obligation banks are expected to hold before granting credit to customers.

The Statutory Liquidity Requirement (SLR) is one of the quantitative and powerful tools of monetary control of the central banks. Changes in SLR can have a marked effect on the money and credit situation of a country. If the central bank raises the average reserve requirement of commercial banks, this would create a reserve deficiency or decrease in the available reserve of depository institutions. If the banks are unable to secure new reserves, they would be forced to contract both earnings and deposits which would result in a decline in the availability of credit and increase the market interest rates. The reverse would happen if the central bank lowers its reserve requirements

As per BB DOS Circular No.-01, dated 19.01.2014, every scheduled bank has to maintain assets in cash or gold or in the form of un-encumbered approved securities the market value of which shall not be less than such portion of its total demand and time liabilities as prescribed by BB from time to time. BB may also prescribe the procedure of determination of assets and liabilities and percentages of maintainable assets in different classes.

At present, the required SLR is 13% daily for conventional banks and 5.5% daily for Islamic Shari'ah-based banks and Islamic Shari'ah-based banking or conventional banks of their average total demand and time liabilities. Banks are advised to follow the circular issued by the Monetary Policy Department of BB from time to time in this regard. The SLR is fixed for the below-mentioned reasons:

·        Monitor bank credit growth.

·        Guarantee the solvency of commercial banks.

·        Force banks to buy government bonds and other securities.

·        Stimulate demand and growth; this is done by lowering the SLR to provide liquidity in commercial banks.

 

If a bank fails to maintain the prescribed SLR, it is liable to pay a penalty to the Bangladesh Bank Penalty will be charged at the prevailing Special Repo Rate on the amount by which the SLR falls short daily.

(i) Components eligible for calculation of Statutory Liquidity Reserve: The eligible components for maintaining Statutory Liquidity Reserve are cash in tills (both local and foreign currency), gold, daily excess reserve (excess of Cash Reserve) maintained with BB. balance maintained with the agent bank of BB and un-encumbered approved securities, credit balance in Foreign Currency Clearing Account maintained with BB.

Daily excess of Cash Reserve (if any) will be calculated using the following formula: Daily excess of Cash Reserve (Day-end balance of unencumbered cash maintained in Taka current accounts with BB-Required cash reserve on a Bi-weekly average basis). For maintenance of CRR and SLR, demand and time liabilities should include all on-balance sheet liabilities excluding the items listed below:

a)     Paid up capital and reserves,

b)    Loans taken from BB.

c)     Credit Balance in Profit and Loss account

d)    Inter-bank items

e)     Repo, Special repo, and any kind of liquidity support taken from BB.

Banks are advised to approach BB for any doubt in reckoning a particular liability as demand or time liability for CRR and SLR computation.

BB has recently changed its monetary policy targeting framework and introduced some new tools in its Monetary Policy Statement (MPS) of July-December, 2023. What are the changes? Do you think the changes will have any impact on Treasury Management

 The Monetary Policy Statement (MPS) of July-December 2023 by Bangladesh Bank (BB) introduced several new policy initiatives:

 

i.                   Policy Interest Rate Corridor: This is a system where the central bank sets the floor and ceiling for short-term interest rates to guide market interest rates.

ii.                 Reference Interest Rate for Lending: This could be a benchmark interest rate that banks use to price loans.

iii.              Exchange Rate Unification: This could involve merging multiple exchange rates into a single rate.

iv.              Calculation of Gross International Reserves (GIR) as per Balance of Payments and International Investment Position Manual (BPM6): This could involve changing the method of calculating GIR to align with international standards.

As for the impact on Treasury Management, changes in monetary policy can indeed have significant effects. For instance, changes in policy interest rates influence commercial interest rates. This can affect the cost of government borrowing and the return on government investments. The introduction of a policy interest rate corridor could provide more predictability for treasury management as it sets a range for interest rate fluctuations.

Moreover, the reference interest rate for lending could impact the cost of new government debt if the government borrows domestically. Exchange rate unification could affect the local currency value of foreign currency-denominated debt payments and receipts.

However, the specific impacts would depend on the details of the changes and the broader economic context. It's also important to note that the effects of monetary policy changes can take time to materialize. Therefore, ongoing monitoring and adjustment would be necessary. Please consult with a financial advisor or professional for more specific insights.

What is CRR and what are the components of Cash Reserve? What is the Cash Reserve Ratio? How do commercial banks maintain CRR?

 The cash reserve ratio (CRR) is the amount of money that the scheduled banks will have to have in deposit with the central bank of the country at all times. If the central bank raises CRR, less money is available to banks. CRR is the amount the bank cannot be deposited anywhere or loaned to borrowers. All banks are obliged to keep their Cash balance with the Central Bank.

 In addition to monetary policy objectives, the BB can also determine processes for maintaining cash reserves. Currently, the required CRR is 4% for the bi-weekly average of gross demand and time Liabilities with a provision of at least 3.5% on a daily basis of the same ATDTL.

 Every scheduled bank has to maintain a balance in cash with BB the amount of which shall not be less than such portion of its total demand and time liabilities as prescribed by BB from time to time, by notification in the official Gazette.

 CRR is one of the following: Bangladesh Bank’s primary tool mainly used to control inflation/deflation economic liquidity. Bangladesh Bank is the top banking institution in Bangladesh and has it Right to amend the CRR at any time.

 The cash reserve ratio is particularly useful in dealing with the rate of inflation/deflation and liquidity in the country. If the central bank is of the opinion that there is too much liquidity in the economy, it will increase the CRR. CRR is extremely powerful tool in the hands of BB, which can dictate the terms in the economy.

 Components of cash reserve:

In the context of Bangladesh Bank (BB), the components of the Cash Reserve Ratio include the following:

Demand and Time Liabilities: The CRR is calculated based on a certain percentage of both demand and time liabilities of banks. Demand liabilities include deposits that are payable on demand, such as current account deposits. Time liabilities include deposits with a specific maturity period, like fixed deposits.

Cash Balances with the Bangladesh Bank: Banks are required to maintain a certain percentage of their demand and time liabilities in the form of cash balances with the Bangladesh Bank. At present, banks are allowed to maintain cash reserves with local currency only. The day-end balances of Taka's current accounts maintained by different BB offices will be aggregated to compute the maintained cash reserve for the day.

Calculation and maintenance:

The Cash Reserve Ratio is expressed as a percentage of eligible liabilities. The ratio is set by the central bank, and banks are required to maintain this reserve in the form of cash with the central bank. This reserve is non-interest-bearing. The balance so maintained shall be unencumbered in all aspects. The encumbered (lien against discounting facility, etc., and capital lien in case of foreign banks) portion of the balance will be deducted while computing both the maintained amount and excess of cash reserve.

Regulatory Tool: The CRR is used as a monetary policy tool to control liquidity in the banking system. By adjusting the CRR, the central bank can influence the amount of money available for lending in the economy. If the CRR is increased, banks have to keep more funds with the central bank, reducing the amount available for lending and vice versa.

Monetary Policy Transmission:

Changes in the Cash Reserve Ratio affect the money supply and consequently, interest rates. It is a tool through which the central bank can influence the cost and availability of credit in the economy, thereby impacting inflation and economic growth.

It is important to note that the specific details, such as the percentage of CRR and types of liabilities subject to the ratio, can vary between countries and are determined by the central bank’s monetary policy framework. In the context of Bangladesh Bank, the specific guidelines and regulations related to the Cash Reserve Ratio will be outlined in the central bank’s policies and circulars.

Components of Demand and Time Liabilities

List of Demand and Time Liabilities:

Various items of demand and time liabilities that are reckonable for the computation of required CRR and SLR are listed below. The items listed are generic in nature and are applicable to both Conventional and Islamic banking.

Demand Liabilities:

(a) Demand Deposits (General)

                   i.            All Current Accounts except from banks

                 ii.            All Cash Credit Accounts (Credit Balances)

              iii.            Demand Portion of Savings 4 Accounts.

              iv.            Overdue fixed deposit accounts

                 v.            Call deposits account other than from  banks (On demand)

              vi.            Unclaimed balance accounts.

            vii.            Interest accrued on the above accounts.

         viii.            All other Deposits are payable to the public on demand e.g. outstanding bills, payment orders, telegraphic transfers & Mt, Outstanding drafts. Drafts payable account

              ix.            Demand drafts

                 x.            Hajj deposits

              xi.            Bonus scheme remittances payable, branch remittances payable, bills payable, certificates payable, foreign currency deposit account, unsold balance of NFCD account.

            xii.            Convertible Taka account.

 

 

 

(b) Other Demand Liabilities

                               i.            Margin of L/Cs

                             ii.            Margin of Guaranties

                          iii.            Lockers Key Security Deposits

                          iv.            Unclaimed Dividend/Dividend Payable

                             v.            Credit Balance and adjustment account

                          vi.            Security Deposit accounts

                        vii.            Sundry Deposits accounts

                     viii.            Any other miscellaneous deposits payable on demand

Time Liabilities:

(a) Time Deposits (General):

                     i.            Fixed Deposits from Customers other than from banks

                   ii.            Special Notice Deposits other than those from banks.

                iii.            The time portion of the savings bank deposits

                iv.            Short-term deposits account

                   v.            Recurring deposits

                vi.            Interest accrued on all above accounts

 

(b) Other time Liabilities:

                               i.            Employee Provident Fund Accounts

                             ii.            Staff pension Fund

                          iii.            Employees Security Deposits

                          iv.            Staff Guarantee or Security Fund

                             v.            Contribution towards Insurance Fund

                          vi.            Any other miscellaneous liabilities payable on notice or after a specified period

                        vii.            Margin account-Foreign Currency

                     viii.            Liabilities towards Foreign banks/Correspondence bank

                          ix.            Bi-lateral trade Liabilities.

Describe the two types of bank liabilities with examples

In monetary analysis only a two-fold classification of bank deposits into (a) demand deposits or demand liabilities and (b) time deposits or time liabilities are made.

a)    Demand deposits or Demand Liabilities:

A demand deposit is money deposited into a bank account with funds that can be withdrawn on demand at any time. The depositor will typically use demand deposit funds to pay for everyday expenses. For funds in the account, the bank or financial institution may pay either a low or zero interest rate on the deposit.

The maximum a person may withdraw can be up to a certain daily limit or up to the limit of their account balance. Common examples of demand deposits would be amounts in a checking account or savings account. Note that demand deposits are different from term deposits. Term deposits require depositors to wait a predetermined period before making a withdrawal.

Demand deposits include current deposits, the demand liabilities portion of savings bank deposits margins held against letters of credit/guarantees, unclaimed deposits, credit balances in the cash credit account, deposits held as security for advances that are payable on demand, and balances in past-due fixed deposits, cash certificates, and cumulative/recurring deposits.

b)    Time deposits or time Liabilities:

Time Liabilities of a bank are those which are payable otherwise than on demand. The liabilities that banks have to pay after a specific time period. Fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, and Gold Deposits come under Time Liabilities.

What are the various methods that can be used to settle international payment?

 

There are several methods that can be used to settle international payments. Here are some of the most common methods, along with a brief description of each:

1.     Wire Transfer: This is a method where funds are electronically transferred from one bank account to another. It involves sending money directly from the sender’s bank to the recipient’s bank. Wire transfers are widely used for international payments and are relatively fast and secure.

2.     Letters of Credit: A letter of credit is a financial document issued by a bank on behalf of a buyer, guaranteeing payment to the seller. It assures the seller that they will receive payment as long as they fulfill the terms and conditions outlined in the letter of credit. This method is commonly used in international trade transactions.

3.     Bank Draft: A bank draft is a payment instrument issued by a bank that guarantees the payment of a specified amount to the recipient. It is similar to a check but is drawn by the bank and not the individual account holder. Bank drafts can be used for international payments and are generally considered a secure method.

4.     PayPal and other Online Payment Platforms: Online payment platforms such as PayPal offer a convenient way to settle international payments. These platforms allow user to send and receive funds electronically using email addresses or account numbers. They often support multiple currencies and provide a level of security and buyer/seller protection.

5.     International Money Orders: Money orders are financial instruments purchased for a specific amount and can be used to make payments. International money orders function similarly to domestic money orders but are designed for cross-border transactions. They can be obtained from banks, post offices, or other financial institutions.

6.     Crypto Currencies: Crypto Currencies like Bitcoin, Ethereum, and others have gained popularity as a means of settling international payments. They allow for peer-to-peer transactions without the need for intermediaries or traditional banking systems. Crypto currencies can provide fast and low-cost transfers, but their acceptance and regulatory frameworks vary across countries.

7.     Trade Financing: In some cases, trade financing methods such as factoring or forfaiting can be used to settle international payments. These methods involve selling or discounting trade receivables or exporting goods to a financial institution or third party, which provides immediate cash in exchange.

It is important to note that the availability and suitability of these methods may vary depending on the countries involved, the amount of the payment, regulatory requirements, and the preferences of the parties involved. It’s always recommended to consult with financial experts or institutions to determine the most appropriate method for a specific international payment.

What do you mean by ‘Real Time Gross Settlement (RTGS)’ system? Explain the advantages of RTGS when used by a country's central bank

 Real Time Gross Settlement (RTGS) is a payment used by central banks to facilitate large-value and time-critical interbank fund transfers. It enables real-time processing and settlement of individual transactions on a gross basis, meaning each transaction is settled individually and immediately, without netting or offsetting against other transactions. Here’s an explanation of the advantages of RTGS when used by the central bank of a country.

1.     Real-Time Settlement: RTGS system provides immediate and final settlement of transactions, ensuring that funds are transferred in real time. This eliminates the credit and liquidity risks associated with delayed or uncertain settlement. The central bank can enhance the stability of the financial system by offering a secure and efficient mechanism for banks to settle their high-value transactions promptly.

2.     High Transaction Volume: RTGS system is designed to handle large transaction volumes effectively. Central banks can process a significant number of high-value transactions seamlessly, allowing banks to conduct their interbank transfers efficiently. This scalability ensures that the payment system can accommodate the needs of a country’s financial sector, supporting economic activities and facilitating the smooth functioning of financial markets.

3.     Enhanced Liquidity Management: The instantaneous settlement nature of RTGS system enables bank to manage their liquidity more efficiently. By having immediate accesses to funds, banks can optimize their cash positions, meet their payment obligations, and manage their liquidity risks efficiently. This contributes to overall financial stability and reduces the need for banks to hold excessive reserves, potentially enhancing their profitability.

4.     Mitigation of System Risks: RTGS system play a crucial role in mitigating systematic risks within the financial system. By providing a secure and reliable mechanism for settlement, the central bank can minimize the potential for settlement failures, counterparty risks, and contagion effects that could arise from delayed or failed transactions. This helps maintain trust and confidence in the financial system, reducing the likelihood of disruptions and crises.

5.     Transparency and Auditability: RTGS system offers transparency and auditability, as each transaction is settled individually and leaves an auditable trail. The central bank can closely monitor and supervise the payment flows, identify and irregularities or potential risks, and take necessary actions to ensure compliance with regulations and policies. This transparency contributes to the integrity of the financial system and helps combat illicit activities, such as money laundering and fraud.

6.     Integration with Monetary Policy: RTGS system provides the central bank with a powerful tool to implement and manage monetary policy effectively. By influencing the availability of liquidity in the banking system, the central bank can control interest rates manage inflation, and maintain price stability. The real-time settlement nature of RTGS enables swift transmission of monetary policy decisions and ensures their impact on the economy in a timely manner.

Overall, the advantages of RTGS system for central banks include real-time settlement, high transaction volumes, enhanced liquidity management, risk mitigation, transparency, auditability, and integration with monetary policy. By providing a robust and efficient payment infrastructure, RTGS system contribute to the stability, efficiency, and integrity of the financial system, supporting the overall economic development of a country.