As you know the country is going through one of the toughest liquidity crisis of the history, which I believe is domestically-driven and has nothing to do with International financial meltdown. In my view, SBP recent measures to ease liquidity concern are not sufficient and following are the key reasons I believe, behind this crisis.
MARKETS NOT AT EASE DESPITE CRR CUT: Despite a quantitative (100bp CRR) ease, domestic call and clean rates appear not to have eased, highlighting concerns over insufficient liquidity and/or rising counterparty risk. In my view, the latter is more likely the case as banks are known to be hoarding cash to fund the recent unprecedented deposit redemptions. In the absence of money creation due to huge NFA outflows, I believe deposit mobilisation should remain a short-term concern as tighter money market rates would likely prevail in the days to follow.
WHAT IS MISSING?Kudos to the SBP for its swift response to the current liquidity crunch. However, I believe it has failed to recognise the real issue, namely, counterparty risk aversion. In the current scenario the top five banks are relatively comfortable on liquidity; but the risks of deposit redemptions and counterparty "deposit vulnerability" are keeping big banks from lending to smaller banks. This, in turn, has sparked panic in the interbank market, keeping money market rates tighter.
WHAT NEEDS TO BE DONE?The SBP should help ease the liquidity crunch for medium and smaller-size banks either through (1) a further cut in CRR rate; or (2) by lowering the CRR limit from the current one-year deposit to three months. This stance was most recently adopted by China on 15th September when the CRR rate was cut by 100bp for all banks, except the top five banks. The two advantages of this move are (1) higher deposit mobilisation, and (2) ease of domestic liquidity and hence, balanced money market rates.
Finally, it is very important to address this issue on prompt basis for the viability of the system. It would be very difficult to control dollarisation and sentiments if any of the banking institution falls. I have complete faith on your leadership and hope you address this issue at your earliest.
(The Writer is Director, KASB group.)