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Bank Indonesia as the lender of the last resort will
introduce new financial instruments early next year to help the
country's banks meet their short-term liquidity needs, the central
bank's senior executive says.
Deputy governor Budi Mulya said here Saturday that the facilities will
include a wider variety of government bonds and central bank bills that
lenders can use as underlying assets to obtain overnight lending from
the central bank.
The central bank will also improve the repurchasing agreement -- or
"repo" mechanism -- for the short-term trading and buying back of bonds
and bills.
"BI wants to ensure banks that there will be facilities for their
short-term liquidity needs," Budi was quoted as saying by Antara on
Saturday.
He had previously mentioned as well that the central bank was also
considering to change its monthly-based benchmark BI rate into an
overnight rate, which will also help facilitate the short-term
liquidity for the market.
Budi further explained that the standing facilities would avoid banks
having to trade large sums of their bond and bill holdings for quick
cash, which may potentially create volatility in the markets.
"Banks won't have to outright sell their holdings. They can instead
temporarily lend them in the central bank, and in return, they will get
the liquidity they need," he said. Such standing facilities are known
as marginal lending facilities.
BI deputy governor Hartadi A. Sarwono announced last week the central
bank's plan to issue six- and nine-month bills, apart of its usual one-
and three-month bills. The wider variety of short-term bills are
expected to allow for the better flow of market liquidity without huge
potential for shocks.
The government also plans to issue short-term treasury bills, which
will gradually replace BI's current bills. It has so far, however, only
sold limited amounts of one-year bills, which has made the markets
still relying on trading of the central bank bills.
Budi said the central bank will improve its auctioning mechanism for
repo agreement, which it plans to run on a daily basis.
With repo agreements, bond holders can sell their holdings and buy them
back later, gaining the proceeds they need, and in return provide
short-term interest to buyers.
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