WILLEMSTAD/PHILIPSBURG--Considering the continuing excess liquidity in the banking system and the declining trend in official foreign exchange reserves, the Central Bank of Curaçao and St. Maarten (CBCS) reintroduced biweekly auctions of Certificates of Deposit (CDs) in mid-August 2019. However, since the third auction, the banks did not fully subscribe to the amounts offered. Consequently, the excess liquidity remained higher than targeted.
To absorb part of the excess liquidity of the banks that was not mopped up because of the shortfalls in the CD auctions, the reserve requirement percentage will be increased from 18 to 19 per cent as of the reserve requirement period of February 17 to March 15, 2020. This will absorb approximately NAf. 70 million of liquidity.
The reserve requirement is an instrument through which the banks must hold a percentage of their deposit base on a blocked account with the CBCS that does not pay interest. As a result, these funds cannot be used for domestic credit extension or investments abroad.
CBCS is also preparing some reforms of the reserve requirement that were discussed during the technical assistance mission of the International Monetary Fund (IMF) on the monetary policy instruments of the central bank, which took place at the end of 2019. These reforms aim to improve the effectiveness of this instrument as well as offering the banks more flexibility in the management of their liquidity. The details of these reforms will be worked out during the coming months.
CD auctions too will be reformed based on recommendations by the IMF. New is the introduction of weekly auctions with a shorter term of two weeks. CBCS only announces the interest rate it is willing to pay, and the banks can subscribe at any amount. These CDs replace the current ones with a term of four weeks.
In addition, the biweekly auctions of CDs with terms of 12, 26 and 52 weeks will be continued. With these, CBCS announces the total amount of liquidity it wants to absorb, and the banks indicate for what amounts, terms and interest rates they are prepared to subscribe. Based on the desired interest rates, CBCS decides which subscriptions will be accepted.
The reformed CD auctions became effective as of the auction on January 31, 2020.
The idea is for commercial banks to grant fewer loans. They have too much money and lend it to the consumer more easily.
This is not considered desirable in a poorly functioning economy. They now have to park 19 per cent of their money at CBCS and can deposit money more often by purchasing deposit certificates, whereby they can bid on the interest themselves.
