6. Open Market Operations
Open market operations- this is another of the tools of the Central Bank, which he can use to implement economic changes. This tool is widely used in those countries where the securities market is sufficiently developed, and is unacceptable where stock market still on the threshold of development. Operations on the open market imply the sale and purchase of securities by the Central Bank (mainly short-term government bonds) in the secondary market. In some countries, legislation prohibits the activity of the Central Bank in the primary stock market.
When the Central Bank buys from commercial banks securities, he increases the amount in their reserve accounts. As a result, the volume of money of increased power grows, the monetary base grows and the money multiplier begins to work, which leads to an expansion money supply in circulation. This process depends on the share distribution of the increase in the money supply to cash (cash balances) and deposits, which economic entities left in the bank at a certain percentage. If the share of cash exceeds the deposit, then monetary expansion should be limited, since the growth of cash leads to higher prices and an inflationary spiral.
If the Central Bank wants to withdraw part of the money from the economy, it sells bonds. Thus, a certain amount is withdrawn from the accounts of commercial banks, which then leads to a decrease in the money supply.
Very often, open market operations are carried out in the likeness of repurchase transactions, which are concluded on the terms of repurchase. Here, the Central Bank sells securities to commercial ones, promising to buy them back after a certain period of time at a higher price. In this case, the profit of commercial banks is the difference between the initial sale amount and the subsequent purchase or redemption amount. In some countries, securities transactions are considered the most flexible instrument of monetary policy. They are carried out exclusively under the control of the state, rather quickly and, if necessary, can be adjusted.
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Open market operations are a tool for flexible and prompt influence on the volume of liquid resources of commercial banks. Open market operations refer to the buying and selling of government securities in order to change the money supply. By regulating supply and demand for government securities, the effect of fluctuations in the volume of money supply in circulation, caused by the nature of the response of commercial banks, is achieved. Yes, sale commercial bank government securities narrows the free resources of CBs for lending purposes, and the purchase, on the contrary, frees up resources and increases lending opportunities.
Conducting operations on the open market, known as the open market policy (open-market policy), has been applied since the 20s. 20th century in the USA. The German bank has been conducting them since 1933, Great Britain - also in the 30s. The open market policy quickly gained popularity due to its high efficiency and flexibility, supplanting other methods of monetary regulation.
Reducing the credit capacity of commercial banks is advisable in a period of high market conditions, increasing - in times of crisis. In a crisis situation, the central bank creates an opportunity for commercial banks to refinance. He puts them in conditions where selling securities to the central bank becomes profitable. There is a simultaneous change in the loan interest and liquidity of commercial banks. At the same time, the purchase of securities from the Central Bank is expedient given the low demand for commercial bank loans from firms and households. At the same time, the conditions of the central bank for the purchase of securities should be more favorable than the conditions for providing loans to the population and enterprises of the non-financial sector.
The development of institutions contributes to the success of an open market policy financial market taking place in the West. Here, central banks operate alongside other lending institutions, including savings and investment companies as well as enterprises. A solid liquidity reserve of commercial banks confirms its financial activity and can be provided as high
Chapter 8. Monetary regulation
profits, as well as a large portfolio of high-yield securities.
Conducting operations on the open market may have some differences. Traditionally, the German Bank sets interest rates for which he is willing to buy securities. At the same time, the volume of sales is not subject to regulation. On the contrary, in the USA and England, the Central Bank determines the volumes of purchase and sale, in accordance with which commercial banks will purchase securities from them. The interest rate here is determined indirectly and depends on the period for which government securities are placed.
The operation of buying securities on the terms of a reverse transaction has also found application in pursuing an open market policy. In this case, the Central Bank purchases securities from commercial banks for a period after which the commercial bikes repurchase the sold securities at a discount, i.e. at a discount relative to the price of the original transaction. REGU transactions are carried out, which have also found application in the relationship between commercial banks and clients. Here, one-day or term repurchase agreements involve the sale of highly liquid securities to banks (in the United States - the Treasury or federal agency) on the terms of their redemption on another day (overnight) or more long term(from a week to a month) at a higher price. The premium to the chain of the primary transaction is the income of a commercial bank that has credited the client against the security of the transferred securities.
Implementing an effective open market policy in Russian Federation requires the expansion of the capacity of the financial market and the adequate functioning of its mechanisms.
In the West, at various times, the main instruments for pursuing an open market policy were:
Treasury bills;
Debt obligations of the government and local authorities;
Interest-free treasury certificates;
Debt obligations admitted to stock trading;
Special bills.
According to experts, after August 1998, the Bank of Russia was faced with the task of developing a mechanism for restoring financial
Part III. Banking intermediation: institutions and organization
market, since operations on the open market are an important tool for regulating liquidity banking system. Under these conditions, the Central Bank offered the market its own short-term zero-coupon bonds of Russia - OBR. These bonds are of a short-term nature: the circulation period is up to 3 months, the maximum issue volume is 10 billion rubles. The Central Bank provided an opportunity for commercial banks to use them as collateral for Lombard, intraday and overnight loans.
At the stage of financial market recovery, the importance of the regulatory activity of the Central Bank of the Russian Federation increases. The government securities market should acquire a new qualitative level, expressed in the predictability of its dynamics and a decrease in the share of speculative transactions carried out. It will circulate securities that require a differentiated approach, for example:
Securities issued for GKO-OFZ restructuring;
New public debt instruments.
11The circulation of municipal securities will continue, the prospects of which will be largely determined by the state of regional economy and finance.
The position of the market for foreign currency government securities (Eurobonds, domestic foreign currency bonds, etc.) will improve only with an increase in Russia's credit rating. Assuming the gay to activate the corporate debt sector - mortgage-backed bonds, commercial bills, etc., which will allow the transfer of government securities capital to the corporate segment.
Cm." Basics banking(Banking) / Ed. K. R. Tagirbekova M.: INFRA-M; Publishing house "Ves Mir", 2001. S. 92 ..
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The open market is the operations of the Central Bank for the purchase and sale of government securities in the secondary market. Purchases in the open market are paid central bank increase in the reserve account of the seller's bank. Total cash reserves banking system increase, which, in turn, leads to an increase in the money supply. The sale of open market securities by the Central Bank will lead to the opposite effect: the total reserves of banks decrease and decrease with other equal conditions money supply. Since the Central Bank is the largest open market dealer, an increase in the volume of purchase and sale transactions will lead to a change in the price and yield of securities. Therefore, the Central Bank can influence interest rates in this way. This is the most best tool However, its effectiveness is reduced by the fact that the expectations of market participants are not entirely predictable. Advantages of this method:
The central bank can control the volume of transactions;
transactions are quite accurate, it is possible to change bank reserves by any given amount;
transactions are reversible, since any error can be corrected by a reverse transaction;
the market is liquid and the speed of transactions is high and does not depend on administrative delays.
In the open market, central banks use two main types of operations:
direct transactions - purchase and sale of securities with immediate delivery. Interest rates are set at the auction. The buyer becomes the owner of securities that do not have a maturity date;
repo transactions are conducted on the terms of a repurchase agreement. Such transactions are convenient because the repayment terms can vary.
The types of open market operations are divided into:
dynamic operations - aimed at changing the level of bank reserves and the monetary base. They are of a permanent nature, and direct transactions are used in their implementation;
protective operations - are carried out to adjust reserves in case of their unexpected deviations from a given level, i.e., they are aimed at maintaining stability financial system and bank reserves. Repo transactions are used for such transactions.
The use of open market operations depends on the level of development, the institutional environment and the degree of liquidity of the government securities market. As an analogue of operations on the open market, the Bank of Russia also uses foreign exchange interventions.
Foreign exchange intervention - buying and selling foreign currency on the domestic market to increase or sterilize the money supply. They affect the exchange rate of the ruble against the dollar. The sale of dollars by the Central Bank will lead to an increase in the exchange rate of the ruble, the purchase - to its fall. If the Central Bank conducts foreign exchange interventions to correct short-term fluctuations exchange rate then he loses control bank reserves and, accordingly, over the money supply. The Bank of Russia plans, in addition to foreign exchange interventions use a more flexible tool - currency swaps.
Currency swaps are operations of buying and selling currency on the terms of immediate delivery with simultaneous reverse urgent deal. They allow you to adjust the level of liquidity foreign exchange market without creating additional pressure on the ruble exchange rate.
What is bank refinancing?
Bank refinancing - a tool monetary policy When the Central Bank lends to a bank, that bank's account with the Central Bank is credited. The passive part of the balance sheet of the Central Bank is increasing, and the total reserves in the banking system are increasing. The assets of the Central Bank increase by the amount of the loan. As a result, an increase in refinancing increases the amount of borrowed reserves in the banking system, the monetary base and the money supply, while a decrease decreases it.
The central bank can influence the amount of refinancing in two ways:
affecting the interest rate on loans;
by influencing the amount of loans at a given interest rate through the refinancing policy.
The refinancing policy affects the volume of lending to banks through the mechanism for issuing loans and involves the Central Bank determining the goals, forms, conditions and terms of lending. Credit refinancing is also used as a stabilization tool
banking system. This is the most effective method providing additional reserves and, accordingly, liquidity to banks during crisis shocks.
The traditional form of refinancing is the recalculation of bills by the Central Bank, the meaning of which is that the Central Bank buys bills already discounted by banks.
The volume of refinancing depends on the level of the refinancing rate (the cost of loans from the Central Bank). But still, the refinancing rate is usually considered as an indicator of the intentions of the Central Bank. By changing the refinancing rate, the Central Bank announces its intentions regarding monetary policy.
Refinancing policy has less direct impact on monetary system. It is possible to directly determine the required change in loan reserves, but it is not known by how much the refinancing rate needs to be changed in order for banks to apply for loans from the Central Bank. Banks' costs of using the refinancing rate are high, and changing the refinancing rate turns out to be an inefficient tool due to the ambiguous impact on financial markets.
Open market operations (OOP), carried out by the central bank on its own initiative, are the main ones both in terms of operational management of the money market (stabilization of short-term interest rates and liquidity of banks) and in terms of long-term monetary policy. Their main distinguishing feature is the initiative of the central bank or its mandatory consent to conduct a particular operation.
Open market operations may be conducted at pre-announced trading sessions(including auctions) or at any time and to any extent at the discretion of the central bank.
Based on the frequency of conducting, the following types of OOP are distinguished:
- regular scheduled surgeries which the central bank announces in advance (an auction for the sale of loans, deposits, etc.);
- irregular operations, which are used by the central bank as the need arises, for example in response to unexpected short-term economic imbalances, and therefore cannot be planned in advance. They are divided into irregular planned (the date is not known in advance) and bilateral transactions, which are not reported to other banks either before or after they are carried out.
By purpose, OOPs are classified as follows:
- corrective (protective) operations designed to compensate for short-term undesirable changes in the structure of bank reserves;
- structural operations, which aim to have a long-term qualitative impact on the monetary sphere (changes in qualitative monetary conditions, such as exchange rate national currency, etc.).
There are three main types of open market operations:
Carrying out operations with securities;
Central bank refinancing of commercial banks;
Carrying out operations with foreign currency.
Securities trading by a central bank is the purchase or sale by a central bank on the open market of fixed-interest securities on its own initiative and at its own expense.
To revive the economy, the Central Bank increases the demand for securities (money enters the economy); if its purpose is to reduce banks' reserves, then it acts on the market on the supply side of securities (binding excess liquidity).
It should be noted two important moments that make it possible for the central bank to achieve its goals. First, central bank operations (unlike commercial banks) are not prioritized, so they are conducted at the best prices that commercial banks cannot offer. Secondly, these operations are carried out with discount bonds, the income and price of which are inversely related (the higher the price (rate), the lower the income on this security). Thus
the central bank, influencing the economic interests of the subjects of regulation, achieves its goals.
Securities transactions differ depending on the following criteria:
Terms of the transaction - purchase and sale "to maturity" or transactions for a period with a mandatory reverse transaction (purchase and sale of securities - "direct" transactions, sale-purchase - "reverse" transactions);
Objects of the transaction - transactions with government or commercial bonds; marketable or non-marketable securities (the latter cannot be freely traded on the secondary market);
Transaction terms - short-term (up to 3 months), medium-term and long-term (over 1 year);
Spheres of operations - banking or open, primary or secondary market;
Methods of setting interest rates - are determined by the Central Bank or the market.
Operations with foreign currency are carried out with the aim of both sterilizing the excess money supply and increasing the supply of liquidity. The frequency of these transactions (particularly as a means of tying up excess money supply) depends on whether the central bank has sufficient foreign reserves.
There are the following types of operations with foreign currency:
Purchase and sale of foreign currency by the central bank without a mandatory reverse operation (most often used as structural operations, the purpose of which is a long-term impact on the exchange rate of the national currency);
Purchase and sale of currency with the condition of a mandatory reverse operation. These operations are used by the central bank as corrective ones, since, carried out for a short period, they do not affect the exchange rate of the national currency.
Operations with foreign currency, as well as with securities, can be direct (purchase-sale) and reverse (sale-purchase).
Thus, based on the considered types of operations in the open market, it is possible to determine the tactics of the central bank when using them:
1. An increase in long-term demand for liquidity can be compensated by the central bank through direct operations: periodic direct purchases "to maturity" of long-term securities, the purchase of foreign currency, an increase in the volume of short-term loans. Short-term demand for liquidity can be offset by increasing the volume of short-term loans. In addition, the central bank can make direct purchases of short-term securities, conduct direct short-term repos and swaps.
2. If banks are faced with excess liquidity, the central bank has the right to: offer them a short-term deposit with the central bank on favorable terms; make a direct sale of bills of exchange with a very short maturity; sell promissory notes subject to repurchase in the near future (short reverse repo); carry out short reverse swaps.
If the central bank is unsure of the duration of liquidity demand fluctuations, then short-term operations (fine-tuning operations) are more preferable, as they affect the market for a short time. In addition, when conducting any operations, the central bank must either influence the amount of liquidity (the rate is determined by the market), or set an interest rate and allow banks to independently determine the amount of liquidity. Consequently, the central bank, conducting monetary regulation, makes it possible to receive feedback (feedback) from the banking system and can assess the reliability, validity and, ultimately, the effectiveness of its actions.
Operations on the open market of the National Bank of the Republic of Belarus are provided by the following types.
Auction OOPs are the main instrument for regulating the liquidity of the banking system by the National Bank, initiated by it and carried out on an auction basis in order to smooth out relatively long-term liquidity fluctuations (up to 30 days for maintenance operations, up to 180 days for liquidity withdrawals). Rates on auction operations may be determined either by the NB or on a competitive basis; limits are not set.
The following operations are carried out on an auction basis:
Purchase and sale of government securities and securities of the National Bank on REPO terms;
Issue of short-term bonds of the NB; . deposit auction;
Lombard auction.
Bilateral OOPs are focused on limited liquidity support in banks in cases of its unforeseen significant outflow; are carried out according to individual applications of the bank for a period of up to 14 days. A feature of these operations is the need to coordinate with National Bank volumes, refinancing period, as well as the type of instrument used. Rate per bilateral transactions is punitive; There are also no limits on them.
On a bilateral basis, the following operations are carried out: Lombard credit at a fixed rate, purchase of foreign currency from banks on the terms of a swap, and operations for the counter placement of deposits.
Structural adjustment operations include: purchase and sale of government securities, as well as securities of the National Bank on terms to maturity. These operations are initiated by the National Bank and are carried out in order to adjust the long-term parameters of the money supply, taking into account the monetary policy targets. The rates for these transactions are oriented towards auction transactions; limits are not set.
5.2.1. The essence of government securities
Government securities are debentures the issuer (the state, most often represented by the treasury) to the acquirer of these obligations (the holder of government securities) that the issuer undertakes to repay the securities on time and in full, pay the interest due, if any follow from the agreement on the purchase of securities, as well as fulfill other obligations that are stipulated in the contract.
In the world, centralized issuance of securities is used as a tool state regulation economy: as a lever of influence on monetary circulation and control of the volume of money supply; and also as a means of non-emission coverage of the deficit of the state and local budgets, a way to attract funds from enterprises and the population to solve certain specific problems. Government securities are traded in the national currency of the issuer.
The central bank helps the government determine the best time to issue bonds, their price, yield and other characteristics that make the issue attractive to investors, the best place to place bonds. In order to successfully cope with this task, the bank must have accurate and timely information about the state of the economy, the movement of credit resources, etc. Despite efforts to be as informed as possible, the bank is sometimes forced to make decisions before the statistics confirm the expected event. . Therefore, he conducts his own research, the results of which are usually published and are of great interest to scientists, economists, managers, employees of financial institutions.
5.2.2. Pricing Models for Government Securities
Analyzing the pricing mechanism for government securities, one should distinguish between elements that are predetermined government bodies, issuing securities, and those that are formed under the influence of the secondary market, which means that they reflect the market processes of the collision of supply and demand. The market elements of this mechanism are not much different from the pricing models for currencies and securities. But the elements subject to state influence acquire specific features.
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The main features of pricing for government securities are laid down by their issuers at the stage of developing and accepting the conditions for issuing securities, determining the market space for their distribution and operation. If such a space is extremely narrow, the price of government securities is almost uniquely determined by such predetermined parameters as the initial offering price, redemption price, interest rate and premium. In this case, the price is tied to the date of sale of the security and may well be called assigned. However, the space of the secondary market, its zone of action is not limited, and the issuer is able to predetermine only the initial price of the initial placement and the final redemption price, while the intermediate prices during the entire period of the securities are set by the market, and not by the state bodies issuing them.
Government bond yield
There are two main types of value of government securities:
Face value - the price set by the issuer, with a certain coupon yield (yield);
market price is the price of paper in the secondary market.
The return on a security is inversely proportional to its market value.
Example. The security was purchased from the issuer by bank A at par value of 100 conventional units. Coupon yield (yield) is 3%. After 1 year, the state repays the debt to bank A 100 units and coupon income, which is 3 conventional units.
If bank A were to sell the paper to bank B for 95 units in the secondary market, then bank B, having redeemed the paper at face value, would receive 100 units - the principal amount of the debt and 3 units - coupon income. Thus, the income of bank B on the security was (100 - 95) + 3 = 8 units (in the example, the calculations are simplified compared to the calculations in the real market).
With the growth of bond yields, which means a fall in their prices, there is an increased interest in investing money in this financial instrument(Fig. 5.2.1). To buy bonds you need National currency, i.e., the demand for a currency increases, which leads to an increase in the exchange rate of this currency. In this case, it is necessary to take into account not only the change in yield, but also to compare the yields of bonds different countries, since the most profitable bonds are of interest.
5.2.3. Operations of central banks in the open market
One of the most important means of regulation monetary circulation are operations on the open market, which consist in the sale or purchase by the Central Bank from commercial banks of government securities, bankers' acceptances and other credit obligations at the market or pre-announced rate. In the case of a purchase, the Central Bank transfers the corresponding amounts to commercial banks, thereby increasing the balances in their reserve accounts. When selling, the Central Bank writes off the amounts from these accounts. Thus, these operations are reflected in the state of the banking system's reserve position and are used as a method of its regulation.
In Russia, open market operations are understood as the purchase and sale by the Central Bank of the Russian Federation of government securities that have a high degree of liquidity. Commercial banks are the main investors in the securities market, which expands the regulatory impact of the Central Bank of the Russian Federation on their lending capabilities.
Currently, in world economic practice, it is open market operations that are the main means of regulating the money supply. This is primarily due to the unusually high flexibility of this tool, which allows you to influence the monetary situation in short-term periods, smooth out unwanted fluctuations in the money supply.
Stabilization credit monetary policy is realized as expansionist (expansion of the money supply) in the period economic downturn and as a restrictive one (restraint in the growth of the money supply or reduction in the money supply) during the period of "overheating" of the economic situation.
Expansionary monetary policy (Expansionary Policy, Easy Money Policy). It is carried out at the stage of economic recession and is aimed at stimulating it. It lies in the fact that the FED supplies banks with an abundance of cash resources that can be used for low-cost loans that expand consumer demand, as well as business investment. For this purpose, the FED buys government securities, thereby increasing the bank's money resources; interest rates on bank loans decrease, the amount of loans issued and the amount of money in circulation grow, which ultimately leads to an increase in consumer demand.
Restrictive monetary policy (Contractionary Policy, Tight Money Policy). It is carried out at the top of the business cycle in order to prevent the overheating of the economy, which can lead to uncontrolled inflation and a severe downturn in activity, turning into a crisis. With timely action, FED seeks to limit growth early to ensure a smooth deceleration and soft decline. business cycle. To do this, the sale of government securities is carried out, as a result of which the volume of bank resources falls, interest rates on loans increase, since the alternative investment of bank funds gives a high return (interest rates on government bonds are high); the volume of loans falls due to their high cost, leading to a slowdown in business activity, increasing unemployment and dampening consumer demand.
5.2.4. Types of government securities
Government securities are usually divided into marketable and non-marketable, depending on whether they are traded on the free market (primary and secondary) or are not included in secondary circulation on stock exchanges and are freely returned to the issuer before their expiration date. The bulk of government securities are marketable.
The following are among the government securities accepted in world practice.
Treasury bills are short-term government obligations, usually redeemed within one year from the time of their issue and sold at a discount, that is, at a price below the face value at which they are redeemed (either sold at par, and issued at a price above par). In the US, such securities are called Treasury Bill (T-Bill, bills).
Medium-term treasury bills, treasury bills - treasury bills with maturities of one to five years, usually issued with a fixed interest payment.
USA - 10-year Treasury Note (10-year treasury notes).
UK - Gilts. Government bonds, known as gilt-edged securities.
Japan - JGB (Japanese Government Bonds) - Japanese government bonds: The Bank of Japan buys 10- and 20-year JGBs every month to add liquidity to the monetary system.
Eurozone - The German 10-year Bund is commonly used as a benchmark. The FOREX market usually checks against 10-year tickets, comparing their number with their counterparts abroad, namely, for the euro - the German 10-year Bund, for the Japanese yen - 10-year JGB and English pound– 10 year old Gilt. The presence of a spread (difference in yield) between 10-year US Treasury notes and non-US bonds affects the exchange rate. More US Treasury Notes (increase in yield) generally benefits the US dollar against foreign currencies.
Long-term treasury bills - with a maturity of up to ten years or more; coupons are paid on them. Upon the expiration of the term, the holders of such government securities have the right to receive their value in cash or refinance into other securities. In some cases long term duties can be repaid at the provisional date, i.e. several years before the official maturity date. In the USA - Treasury-Bonds (T-Bond, bonds). This is the most important indicator of inflation expectations in the markets.
Markets tend to use quantity (rather than price) when it comes to bond levels. As with all bonds, the amount of 30-year Treasury bills is inversely proportional to price. There is no clear correlation between a long bond and the US dollar. But the following attitude usually remains - a fall in the price of a bond (growth in quantity) due to inflationary anxiety can "crush" the dollar. The rise may be the result of strong economic data. However, as the supply of 30-year bonds began to decline due to the actions of the Treasury to reimburse them (debts are bought back), the role of the 30-year bond as a benchmark is gradually being transferred to its 10-year version. As a benchmark asset, long bonds move capital flows for global reasons. Financial or political turmoil in Third World markets generates hot interest in US Treasuries due to their safe nature, thus helping the dollar.
Eurobond (Eurobonds).
A bond issued outside the issuer's country of origin, usually by its overseas affiliates. These bonds do not have to be traded in Europe, although they main market is located in London. The denomination of Eurobonds is set in the currency of another country deposited in the country of issue, so there are Eurodollar and Euroyen bonds.
- A bond offered for sale after the issue simultaneously to investors from different countries.
- A bond guaranteed by an international syndicate.
The credit rating expresses the opinion of the rating company regarding the ability and readiness of the issuer in a timely manner and in in full carry out their financial obligations. Credit ratings can be assigned to an issuer (sovereign government, regional and local authorities, corporations, financial institutions, infrastructure facilities, insurance companies, managed funds) or an individual debt obligation. Since government securities are backed by the country's property, the government's long-term credit ratings can be attributed to the rating of government securities.
A recommendation as to whether to buy, sell or hold certain securities,
opinion about market price debt obligations and investment attractiveness issuer for a particular investor.
Moody's (http://www.moody's.com);
Standard & Poors (http://www.sandp.ru);
Fitch Ibca. (http://www.fitchibca.com).
The long-term rating evaluates the issuer's ability to fulfill its debt obligations in a timely manner. Long-term ratings range from the highest category - "AAA" to the lowest - "D". Ratings ranging from "AA" to "CCC" may be supplemented by plus (+) or minus (-) signs indicating intermediate rating categories in relation to the main categories.
"Positive" - the rating may increase.
"Negative" - the rating may go down.
"Stable" - change is unlikely.
“Developing” – the rating may be upgraded or downgraded.
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