Indonesian banks will switch to reserves averaging in July

Latest move in Bank Indonesia’s major overhaul of monetary policy transmission

Bank Indonesia
Bank Indonesia
Christopher Jeffery

Banks in Indonesia will be able to manage their daily liquidity requirements using a reserves averaging mechanism, effective from July 1. The introduction of reserves averaging aims to enhance the ability of banks to manage their daily liquidity requirements by enabling them to trade in the interbank market with improved information about their liquidity needs.

“Reserve averaging will start in July,” Bank Indonesia deputy governor Perry Warjiyo tells Central Banking journal in a wide-ranging interview published today (June 21). “We have already communicated with the banks. They are quite happy and positive this will benefit them.”

Warjiyo says some banks still need to adjust their “asset and liability management”, “internal procedures” and “capacity”, adding there will be “some transition required to be fully effective”. But the deputy governor says the banks are “positive” and “look forward to implementing reserve averaging”.

Reserve averaging should help to support financial market deepening as the liquidity management of the banks becomes more dynamic.

Its introduction is the latest in a series of efforts undertaken by Bank Indonesia over the past 18 months, designed to improve the country’s monetary policy framework, and expand and deepen its financial markets.

The central bank has already shifted its policy rate from the 12-month Bank Indonesia rate to the seven-day reverse repurchase agreement (repo) rate, and narrowed the interest rate corridor between overnight lending and deposit facilities.

Warjiyo says the shift in the policy rate brought Bank Indonesia into line with international “best practice” by making the operational target of monetary policy short term – and then letting the market determine and transmit the term structure.

The success is not only in the way we formulated the reform, but also how we managed the operational risk
Perry Warjiyo, Bank Indonesia

The shift in policy has also helped to develop the repo market. The daily average volume is now between IDR1 trillion and IDR1.7 trillion ($75 million to $128 million) per day, 74 banks have signed global master repos and 47 others are active in the repo market, according to Bank Indonesia.

“The success is not only in the way we formulated the reform, but also how we managed the operational risk,” says Warjiyo. “We did extensive communication with investors and other market participants, both domestic and overseas, to explain to them this was a new reform of our monetary operations framework.”

Variable rate tenders

Warjiyo, a former executive director at the International Monetary Fund, says Bank Indonesia is enjoying success with variable rate tenders in its monetary policy operations. This includes tenors from overnight through to 12 months, despite initial plans to only extend the tenors to three months.

As a result, liquidity management by banks is focusing on longer maturities, with 54% of their liquidity now being invested in monetary instruments beyond three months, according to the deputy governor. “Only about 17% of their funds are invested in overnight instruments, with the rest in overnight to three months,” he says.

Warjiyo says the central bank’s current focus is “to introduce more instruments at the longer tenor” and “further deepen the liquidity in the market”, as well as “the market discovery of the interest rate”, adding that the term structure beyond six, nine and 12 months is “still a little steep”.

Bank Indonesia has issued regulations for interbank negotiable certificates of deposit (NCDs) and about IDR20 trillion worth have been issued so far.

“Our aim is for the NCDs to be traded in the market. We have also co-ordinated with the government to issue more Treasury bills to help their liquidity management, as well as to help with our efforts to deepen the money market,” Warjiyo says.

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