THE Bankers Association of Zimbabwe (BAZ) has rejected government's proposals for a new special purpose vehicle (SPV) to assume the lender-of-last-resort (LOLR) function currently reserved for the Reserve Bank of Zimbabwe (RBZ), arguing that the central bank is better placed to carry out that role, the Zimbabwe Independent can reveal.
BAZ has now come up with its own proposals which the RBZ and Ministry of Finance are considering as part of efforts to unlock close to US$1 billion in the local market to improve the liquidity situation. Banks are said to be sitting on US$400 million in cash and US$400 million in real time gross settlement surplus funds at the central bank. There is also more funds in nostro and other offshore accounts.
Although this would not resolve the liquidity problems embedded in the economy, the money would alleviate the crisis.
According to a letter by BAZ president George Guvamatanga to RBZ governor Gideon Gono, dated May 14, 2012, seen by the Independent, the bankers said instead, the central bank should be capacitated to fulfil its function of LOLR. The Reserve Bank of Zimbabwe Act (Chapter 22:15) vests that role in the bank.
Bankers feel the creation of the SPV was a short-term solution premised on fears that re-capitalising the RBZ might result in a diversion of funds. However, considering the existing legal framework and expertise within the RBZ, they believe it is best placed to manage the interbank market. All that was needed were checks and balances to be put in place to ensure there is no diversion of funds once the RBZ is capacitated.
"Currently, RBZ is sitting on US$400 million in the settlement account and to our knowledge there have been no issues raised. In addition to strong checks and balances, we consider that the ring-fenced structure within RBZ must be backed by a guarantee or other form of insurance which could be sourced from multilateral or bilateral institutions and priced into the accommodation rates," reads the BAZ letter. "Against this background, it is our humble submission that RBZ should be capacitated to fully assume its role as a lender-of-last-resort."
Gono yesterday confirmed receiving the BAZ proposals.
"I confirm receiving the proposals and consultations are underway with both my boss (the) Finance minister (Tendai Biti) and BAZ.
"Their proposals are commendable, but are not yet ready for public consumption. So I can't go into details about that. Once consultations with Treasury are through and a way forward agreed, all market players and stakeholders would be advised."
Bankers argue the major challenge was on the question of whose money the participating banks would invest in the proposed vehicle.
"Banks cannot invest depositors' funds as capital into the SPV as they have no legal authority over these funds. We estimate that transitory deposits constitute over 80% of total deposits ... this means that, notwithstanding the legal issues, it would be technically difficult to invest short-term deposits in the SPV, which requires relatively long-term funds," BAZ said.
The BAZ pointed out that if its members were required to inject their own capital, shareholders' approvals would be required. However, shareholders are likely to be reluctant to approve such an investment considering that banks had struggled to meet their own minimum capital requirements.
BAZ argues that due to the absence of a substantive guarantor in the SPV, this would create concentration risk as most banks would be directly exposed to the vehicle should default occur, magnifying systemic risk within the sector since banks would be holding the same assets.
This, it said, was because the bulk of the SPV assets would, in fact, be exposed to stressed entities.
The bankers were concerned that there was no clarity on how the investors would recoup their funds in the event of the entity being wound up. Moreso, investors needed to be assured of a sufficient return on their money.
The bankers proposed that instead the RBZ could issue non-negotiable certificates of deposit (NNCDs) against the nostro balances transferred by banks to the settlement account, which amounted to US$243 million between March and early this week. Together with the US$30 million from government, this could be used to ease liquidity.
The bankers insist the LOLR function should not be based on traditional overnight accommodation as the liquidity challenges the banking sector faced were structural and this could only be resolved by offering 30 to 180-day accommodation to banks.
They feel government should urgently resume the issuance of Treasury bills or alternative instruments, using the RBZ as an agent, as a tool to smoothen its cash flows, within the cost budgetary framework by anticipating monthly collections from the fiscus.
"We also believe that that the Reserve Bank must be capacitated to play its role as lender-of-last-resort as well as banker to the government with the necessary checks and balances to ensure accountability of funds disbursed," the letter says.