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National Bank of Azerbaijan gears up for global financial crisis run-away

14 October 2008 09:33 (UTC +04:00)

The board of the bank has passed a decision to cut the key rates to 12% from 15%, reducing the interest rate ceiling to 17% from 20% and leaving the interest rate floor unchanged to narrow the corridor.
Besides, under the decision, compulsory reserve requirements on banksâ€™ liabilities in national and foreign currencies dropped to 9% from 12% and compulsory reserve requirements on banksâ€™ external liabilities fell to 0% from 5% effective November 3.
The central bank said in a statement that strategic foreign exchange reserves reached $17 billion and total foreign assets exceeded liabilities by $9 billion.
â€œAs a result, Azerbaijan achieved to strengthen its creditor (asset) position in financial relation with the global economy. Strategic currency reserves further increased our countryâ€™s solvency since the reserves exceeded foreign debt by 1.7 times. In addition, the central bank and the government work closely in order to more reliably protect financial stability in the banking system and preventively neutralize foreign risk factors. . These measures include integrated prudential regulation for higher resilience against external economic crisis and for higher flexibility of liquidity instruments,â€ said the statement.
The bank said protection of the banking system from the potential risks has been increased this year and management of credit, liquidity and market risks were taken under special control.
According to the statement, the measures can save liquidity at an adequate level and improve the financial viability of banks.
The key rate cut is aimed at easing monetary policy. That is to say, easing monetary policy is needed and this shows that there are problems emerging in the banking system. Despite the restriction of consumer lending, commercial banks were faced with a liquidity problem, as proved by the sharp decline in repo transactions and an increase in the centralized credit market.
Thus, the central bank helps banks to solve the problem of liquidity, by making funds cheaper and reducing reserves.
At the same time, it should be noted that the external debts owned by Azerbaijan-based banks stood at AZN 1 598.3 million, a historical high level. This poses a serious threat to the national banking system, given the likelihood of bankruptcies of major financial institutions.
So, the decision to abolish the reserve requirements may be more profitable for banks than cutting key rates. In general, the credit market is be expected to intensify after the rates were lowered, otherwise, this step would be futile, and the rate cut would remain a theoretical figure playing no role in the rehabilitation of the banking system.