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J jawboning and dollar defencePublished: Friday | November 9, 2012 0 Comments
Aubyn Hill financial gleaner COLUMNIST
Brian Wynter, Bank of Jamaica governor, during the quarterly report to the media.-File
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Recently, the Governor of the Bank of Jamaica (BOJ) hosted what the Financial Gleaner labelled a "hastily called press conference" to introduce three new [COLOR=blue !important][COLOR=blue !important]financial [COLOR=blue !important]instruments[/COLOR][/COLOR][/COLOR] to the market with "awkward tenure" periods of 49 days, 182 days and 364 days. The instruments were priced above the normal Treasury bill rate with the main aim of draining Jamaican dollars from the marketplace.
The Government of Jamaica payouts on its bonds (borrowings from institutions and individuals) have had the effect of "flooding" the market with Jamaican dollars.
The relative dearth of alternate investment destinations - private investors apparently see no real private-sector investment destina-tions, or are terribly risk averse - means that the BOJ has to take steps to remove all that cash from the economy.
If the BOJ did not act, the plentiful cash could begin to drive inflation up and, just as ominously, quicken the run after [COLOR=blue !important][COLOR=blue !important]US [COLOR=blue !important]dollars[/COLOR][/COLOR][/COLOR] and thereby further weaken the Jamaican dollar.
Given the valiant private and public effort the governor has been putting out to defend the local [COLOR=blue !important][COLOR=blue !important]currency[/COLOR][/COLOR], one suspects that the second of the two outcomes from a too-liquid [COLOR=blue !important][COLOR=blue !important]currency [COLOR=blue !important]market[/COLOR][/COLOR][/COLOR] is the one he seeks most to avoid.
BANKERS FEELING PRESSURE
Banking practitioners and students of the industry are very familiar with the concept and behaviour known as 'central bank jawboning'.
Jawboning happens when the governor (usually, but it could be some other senior bank official) brings the considerable weight of his office -- his regulatory authority and power to impose sanctions are enormous, and both can be painful - to bear down on a group of banks, or a bank, in order to extract a particular behaviour, or to cease an action that is distasteful to the BOJ.
Given the way these things work, one can hazard a good guess that the JMD-USD [COLOR=blue !important][COLOR=blue !important]exchange [COLOR=blue !important]rate[/COLOR][/COLOR][/COLOR] 'stability' has been the object of BOJ jawboning in recent months.
This could very well take the form of a quite strong 'encouragement' from the BOJ to the banks under its jurisdiction, and all banks which have offices in Jamaica must obtain a BOJ licence, to ensure that the exchange rate does not fall too much past the J$91 mark.
The BOJ has taken a practical step that should readily remind banks of its power and is causing a pinch on banks' profitability.
In the past, banks were required to surrender five per cent of its foreign exchange taking to the BOJ at the BOJ's weighted average rate. Subsequently, that amount was increased by 15 per cent to 20 per cent of foreign exchange intake at the banks weighted average foreign exchange rate from a set period of time before the submission date.
The banks' average rate is better, generally, than the BOJ's rate for the five per cent. Banks could possibly get more from their customers for the 20 per cent sent to the BOJ but that possibility is removed.
UNOFFICIAL FOREX MARKET
Bankers are fully aware that the BOJ could raise the foreign exchange submission rate above the current 20 per cent, therefore when the governor or his senior officials indicate, subtly or otherwise, that the BOJ has a particular exchange rate which it prefers, then bankers will generally toe the line.
We all know, however, that everything has a price.
The foreign exchange taken into banks by its customers about six or so months ago was in the high US$40 million per day.
A few months ago, that amount fell to about US$33 million to US$35 million, these days the figure is down to the mid-US$20 million.
Bankers generally agree that customer demand for foreign exchange has not really fallen; some argue that the demand has increased given the uncertainty about the IMF agreement.
So if the demand for foreign currency is the same or higher and those demands that have to be met are being met, but the banks are recording much smaller requests, then it is fair to believe that those transactions are being conducted outside the banking system.
There is a significant risk when large financial transactions are being conducted outside banks in unregulated places.
Many bank customers may simply have decided that the rates the banks are offering are not realistic and do not correspond to those in the market.
They then begin to trade among themselves, and if this is allowed to continue the numbers will balloon and begin to attract unscrupulous operators.
At that point, that activity outside the official banking system is generally called a black market.
There is danger to all of us in the operations of any type of black market. Unsuspecting and trusting persons can be taken advantage of and will lose money.
Banks will lose revenues since they no longer handle these transactions, and the BOJ will lose some control over currency transactions and some of its economic data will be incomplete.
The BOJ has to bear in mind that if the foreign exchange rates with the banks under its control become too far out of step with the marketplace, individuals and businesses will find alternatives to the in-the-bank managed rates. Jawboning may be necessary, but it must not ride rough-shod over the market realities.
The significant fall in the amount of foreign currency being brought into our banking system is a cause for concern.
This fairly precipitous fall begs the question as to how realistic and sustainable is the current official exchange rates.
Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years. writerhill@gmail.com
Aubyn Hill financial gleaner COLUMNIST
Brian Wynter, Bank of Jamaica governor, during the quarterly report to the media.-File
1 2 >
Recently, the Governor of the Bank of Jamaica (BOJ) hosted what the Financial Gleaner labelled a "hastily called press conference" to introduce three new [COLOR=blue !important][COLOR=blue !important]financial [COLOR=blue !important]instruments[/COLOR][/COLOR][/COLOR] to the market with "awkward tenure" periods of 49 days, 182 days and 364 days. The instruments were priced above the normal Treasury bill rate with the main aim of draining Jamaican dollars from the marketplace.
The Government of Jamaica payouts on its bonds (borrowings from institutions and individuals) have had the effect of "flooding" the market with Jamaican dollars.
The relative dearth of alternate investment destinations - private investors apparently see no real private-sector investment destina-tions, or are terribly risk averse - means that the BOJ has to take steps to remove all that cash from the economy.
If the BOJ did not act, the plentiful cash could begin to drive inflation up and, just as ominously, quicken the run after [COLOR=blue !important][COLOR=blue !important]US [COLOR=blue !important]dollars[/COLOR][/COLOR][/COLOR] and thereby further weaken the Jamaican dollar.
Given the valiant private and public effort the governor has been putting out to defend the local [COLOR=blue !important][COLOR=blue !important]currency[/COLOR][/COLOR], one suspects that the second of the two outcomes from a too-liquid [COLOR=blue !important][COLOR=blue !important]currency [COLOR=blue !important]market[/COLOR][/COLOR][/COLOR] is the one he seeks most to avoid.
BANKERS FEELING PRESSURE
Banking practitioners and students of the industry are very familiar with the concept and behaviour known as 'central bank jawboning'.
Jawboning happens when the governor (usually, but it could be some other senior bank official) brings the considerable weight of his office -- his regulatory authority and power to impose sanctions are enormous, and both can be painful - to bear down on a group of banks, or a bank, in order to extract a particular behaviour, or to cease an action that is distasteful to the BOJ.
Given the way these things work, one can hazard a good guess that the JMD-USD [COLOR=blue !important][COLOR=blue !important]exchange [COLOR=blue !important]rate[/COLOR][/COLOR][/COLOR] 'stability' has been the object of BOJ jawboning in recent months.
This could very well take the form of a quite strong 'encouragement' from the BOJ to the banks under its jurisdiction, and all banks which have offices in Jamaica must obtain a BOJ licence, to ensure that the exchange rate does not fall too much past the J$91 mark.
The BOJ has taken a practical step that should readily remind banks of its power and is causing a pinch on banks' profitability.
In the past, banks were required to surrender five per cent of its foreign exchange taking to the BOJ at the BOJ's weighted average rate. Subsequently, that amount was increased by 15 per cent to 20 per cent of foreign exchange intake at the banks weighted average foreign exchange rate from a set period of time before the submission date.
The banks' average rate is better, generally, than the BOJ's rate for the five per cent. Banks could possibly get more from their customers for the 20 per cent sent to the BOJ but that possibility is removed.
UNOFFICIAL FOREX MARKET
Bankers are fully aware that the BOJ could raise the foreign exchange submission rate above the current 20 per cent, therefore when the governor or his senior officials indicate, subtly or otherwise, that the BOJ has a particular exchange rate which it prefers, then bankers will generally toe the line.
We all know, however, that everything has a price.
The foreign exchange taken into banks by its customers about six or so months ago was in the high US$40 million per day.
A few months ago, that amount fell to about US$33 million to US$35 million, these days the figure is down to the mid-US$20 million.
Bankers generally agree that customer demand for foreign exchange has not really fallen; some argue that the demand has increased given the uncertainty about the IMF agreement.
So if the demand for foreign currency is the same or higher and those demands that have to be met are being met, but the banks are recording much smaller requests, then it is fair to believe that those transactions are being conducted outside the banking system.
There is a significant risk when large financial transactions are being conducted outside banks in unregulated places.
Many bank customers may simply have decided that the rates the banks are offering are not realistic and do not correspond to those in the market.
They then begin to trade among themselves, and if this is allowed to continue the numbers will balloon and begin to attract unscrupulous operators.
At that point, that activity outside the official banking system is generally called a black market.
There is danger to all of us in the operations of any type of black market. Unsuspecting and trusting persons can be taken advantage of and will lose money.
Banks will lose revenues since they no longer handle these transactions, and the BOJ will lose some control over currency transactions and some of its economic data will be incomplete.
The BOJ has to bear in mind that if the foreign exchange rates with the banks under its control become too far out of step with the marketplace, individuals and businesses will find alternatives to the in-the-bank managed rates. Jawboning may be necessary, but it must not ride rough-shod over the market realities.
The significant fall in the amount of foreign currency being brought into our banking system is a cause for concern.
This fairly precipitous fall begs the question as to how realistic and sustainable is the current official exchange rates.
Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years. writerhill@gmail.com