MORE details emerged this week on the liquidity crisis rocking the banking sector and how banks have tied up depositors’ funds in securities and mo
ney market instruments.
Information to hand shows nearly all banks, including building societies,
are in a liquidity emergency for various reasons, including the prevailing macro-economic conditions, difficulties in payment of statutory reserves and pouring depositors’ funds into speculative securities and money market investments.
While banks have made muffled protests in a bid to deny reports that they have routed depositors’ funds into securities and money markets, detailed information shows that most banks diverted funds into those instruments.
Securities are basically fungible or negotiable instruments representing financial value. They are usually categorised into debt securities such as banknotes, bonds, debentures, and equities.
Securities may be represented by a certificate or an electronic book entry.
Money market instruments are short term debt instruments that may have characteristics of deposit accounts like certificates of deposit and certain bills of exchange. They are highly liquid and are sometimes referred to as “near cash”. Commercial paper is also often highly liquid.
Documents show that 29 financial institutions — currently stricken by the liquidity crisis — have put funds in securities and other investments.
In the process, the institutions committed an average of 26,33% of their balance sheets into those activities, leaving them heavily exposed to the liquidity constraints now prevailing in the sector.
According to the Banking Act it is illegal for banks to own shares unless they are held as a security for a loan or are owned through swapping debt for equity.
The beleaguered commercial banks and other financial houses were this week scrambling to get unsecured loans from the Reserve Bank to cover their precarious positions.
This confirmed banks were facing acute liquidity problems. Almost all banks are teetering on the brink of collapse as a result.
Most banks have been unable to collect their cash requirements from the central bank to deal with cash shortages due to lack of security. Banks have also been unable to pay statutory reserves.
While monetary authorities say the banks have put themselves in trouble, banks say they invested in securities and other investments because of the prevailing hyperinflation to protect the value of deposits.
The banks argue keeping deposits in accounts under these circumstances in which year-on-year inflation, according to the International Monetary Fund, is 150 000%, could only result in wiping out of value.
“What the banks did was rational even though it was unlawful. Under these economic circumstances any reasonable banker would have done the same,” a top banker said yesterday.
“It’s true some of the activities of the banks are illegal, but the Reserve Bank itself is also involved in unlawful activities such as buying foreign currency in the black market and outrageous quasi-fiscal activities. The banking sector, from the smallest bank to the Reserve Bank, are part of the problem.”
However, monetary authorities say they have letters from banks showing banking executives were now admitting they diverted depositors’ funds into securities and other investments in a bid to protect value and hedge against inflation.
“We have a bunch of letters from banks showing that they now admit to have illegally put depositors’ funds into securities and money market instruments in a bid to secure value and their positions. This led them to fail to pay depositors on demand,” a central bank official said.
“Some letters are very clear banks stashed money in securities and shares. Also apparent in the letters is that most banks don’t have security against which to borrow from the central bank. That’s why they are now pleading for unsecured borrowing. It is fact banks have been engaging in unethical and imprudent activities which partly led to the liquidity crisis.”
Reserve Bank officials read the riot act to bankers in a tense meeting last Thursday over the current situation. Banks were told that it was unacceptable and unsustainable for them to rely on central bank bailouts.
In the end it was resolved only banks that have paid interest on previous borrowings would be considered for overnight accommodation at a rate of 1 500%. This left most banks still stuck in a financial quagmire.