Central bank sale of treasury bills

It is time for a few examples (the starting point is Balance Sheet 5). The CB undertakes an OMO and offers LCC 100 billion treasury bills (TBs) on tender with the specific purpose of increasing the indebtedness of the banks, i.e. reducing bank liquidity (NER). Its policy stance is shifting toward the austere side. The banks' tender rates are the lowest (= prices highest) and the TBs are allocated to them. The immediate changes to the relevant balance sheets are indicated in Balance Sheets 6-7.

BALANCE SHEET 5: CENTRAL BANK (LCC BILLIONS)

The banks paid the CB by EFTs through the payments system. These payments end up as debits on their accounts at the CB.134 The banks are now short of LCC 100 billion, i.e. they no longer have enough reserves (RR) to satisfy the reserve requirement. This is the only deal done on this day; therefore there are no other funds available in the interbank market. Outcome: the banks have no option by to increase their borrowings from the CB at the KIR. The CB credits their reserve accounts and their balance sheets end up as indicated in Balance Sheets 8-9.

The stock balance sheet now appears as shown in Balance Sheet 10 (changes are highlighted). Thus:

BALANCE SHEET 10: CENTRAL BANK (LCC BILLIONS)

From this example you will understand that whenever the CB undertakes a transaction it will appear on the banks' reserve accounts. It will then reflect on the central bank's loans to the banks - because they are either in surplus and repay part of their CB debt or in deficit and increase their CB debt.

Central bank forex swap deal with banks

In order to cement this significant function of the CB in the implementation of monetary policy into your data bank, we present another example. The central bank's forecast says that government's spending of LCC 100 billion on goods purchased from the NBPS will be cleared in the banking system today. This will increase the banks' liquidity situation (increase NER) which does not fit with the central bank's monetary policy stance. It undertakes an OMO transaction: it sells LCC 100 billion forex to the banks (under a swap deal). See Balance Sheets 1-4.

The central bank's stock balance sheet appears as in Balance Sheet 15 (see highlights). In terms of the liquidity analysis we have:

Real cause of NO change in NER = the liquidity creating effect of government spending was neutralized by an OMO transaction undertaken by the CB.

BALANCE SHEET 15: CENTRAL BANK (LCC BILLIONS)

A comparison of Balance Sheet 15 with the original balance sheet (Balance Sheet 16) will make this transaction more clear. The original numbers that change are indicated in green.

BALANCE SHEET 16: CENTRAL BANK (LCC BILLIONS)