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The role of panel banks
in the process of money market
formation
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B I A T E C
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Ing. Peter Andresič
Národná banka Slovenska
On 18 December 2008, an annual meeting of the panel banks was held at
Národná banka Slovenska. Under standard circumstances, the purpose of such annual
meetings has been the evaluation of the activity of panel banks, and the representatives of
commercial banks to comment on the monetary were allowed policy activities of Národná
banka Slovenska during the past period. The extraordinary nature of the December
meeting consisted in the fact that it was last of its kind and that the panel bank institute
was dissolved at the end of the meeting. Due to the fact that the panel banks had played
a key role in the formation of the Slovak financial market, in particular the money market,
I consider it appropriate to go back to the origin of this selected group of banks and to
recapitulate the most important moments.
The need to create a bank group that would be
able to implement the standard rules and procedures widely used in advanced financial markets
due to its dominant position on the domestic financial market arose immediately after Slovakia’s
independence. In early 1993, the NBS started to
perform activities aimed at detecting the prices
of the shortest maturities traded on the domestic
money market. The necessity to know the deposit
prices was mainly related to the fact that the NBS
initially adopted the role of the market maker for
the treasury bills issued by the Ministry of Finance
of the Slovak Republic, mostly to be found in the
NBS portfolio.
The effort to effectively place treasury bills
on the secondary market could have only been
successful with sufficient information about the
price level on the basic, i.e. money market. The
first price indications for the purchase and sale of
deposits with a maturity of up to one month have
been obtained by the NBS by means of simple averaging the data provided by commercial banks
based on a telephone survey. This form of ascertainment was launched in March 1993. However,
the participating banks were by no means obliged
to provide data or even to enter into transactions
at those prices. The prices were ascertained once,
then twice a week.
The demand for increasingly up-to-date information on interest levels in the money market
required a change in the price ascertainment
periodicity. From May of the same year, the NBS
performed daily price ascertainment. For the sake
of interest: the spread, i.e. the difference between
the bid and offered rate as one of the most important indicators of liquidity on the relevant market,
was at the level of 2% or 200 basis points during
that period. It was as early as at that time that the
first attempts to institutionalize the whole process related to the ascertainment and setting of
the actual values of money on the domestic financial market occurred. Not only the NBS, but
also the banks themselves represented by money
market dealers were the initiators of this process.
Nevertheless, the first unofficial meeting of the
future panel banks was held only in September
1994 in Poštová banka; several bilateral, as well as
multilateral mutual meetings between the central
bank and the commercial banks having preceded
that meeting.
The September meeting brought an agreement on the system of ascertainment and publishing of rates, as well as the rules for the setting
– quoting of prices on the part of commercial
banks. The result of these efforts was an extension
of the range of quoted deposits by the addition
of the 3 and 6 month maturity, a reduction of the
spread between the bid and ask price below the
value of 100 basis points and the publishing of
rates under the heading Interest Rate Monitoring
in professional press. However, the problem that
the banks or dealers had no obligation to quote
or comply with the quoted rates remained.
Efforts to eliminate this serious defect at least
by means of a gentlemen’s agreement between
the dealers representing the individual banks on
the money market occurred as early as at the next
meeting in January 1995. Thus, a group of eight
banks arose, whose koruna dealers acknowledged
those unwritten agreements and who wanted to
implement them in practice.
On the basis of those agreements, it was possible to officially establish the BRIBOR (BRatislava
InterBank Offered Rate) in the summer of the same
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year (3 July 1995); for the time being, the BRIBOR
included money market rates with a maturity of
up to 3 months and with the spread between the
BRIBOR and BRIBID rates not exceeding 50 basis
points. Thus, the financial market of Slovakia has
obtained its price basis – a basis, to which other
financial products and derivatives, which are
a standard part of advanced financial markets,
could be related to during the years to come. For
Národná banka Slovenska, the BRIBOR became
both an important information source on the actual interest situation on the money market and
a feedback about the influence of its own monetary policy decisions. Because the money market is generally considered to be a means used
by central banks to influence the economic processes in the country, the feedback factor appears
to be particularly important.
After the introduction of the BRIBOR, at the end
of 1995, the first indications of and efforts towards
a switch of the performance of monetary policy
from what is called quantitative control to qualitative control, i.e. control by means of interest
rates, appeared. In practice, this meant that the
NBS tried to influence the money market interest
rates by means of purchases and mainly sales of
treasury bills from its portfolio, so that they correspond to its conception about their appropriate
setting. At this stage, the NBS set its internal interest rate target in the form of a pre-set corridor of
interest rates of the interbank deposit market as
a means to influence the loan activity of banks.
The corridor was set empirically and was based
on the current state of the market. The rate stabilization attained showed its first positive effects in
the binding of loan activities to the BRIBOR and
in the replacement of the discount rate used for
these purposes.
However, this primary stage of interest control
efforts was only short-term and soon the practice
demonstrated that neither the general economic
conditions, nor the financial market itself enabled to continue the started process at that time.
For the time being, the so-called transmission
mechanism of the transmission of interest rate
signals of the central bank to the real economy
did not work in Slovakia and the money market
represented an almost independent closed circuit. The insufficiently developed money market,
unfinished privatization and restructuring of the
biggest bank houses, the current monetary policy
based on a fixed exchange rate and the use of direct control instruments, such as credit limits, represented only some of the reasons reducing the
transmission mechanism efficiency. It was also
important that that money market itself or its participants needed time to create links and channels ensuring the transmission of impulses in the
form of rates to other segments of the financial
market and the economy as a whole.
From this point of view, the establishment of
the BRIBOR was only the beginning of the process
of setting up an effective money market able to
transmit the interest rate decisions of the NBS to
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real economic environment on the one hand and
to provide credible information about the current
and expected price of money on the other hand.
The next step in this process was the official institutionalization of the panel banks system, based
on the assumption that this formal act would
provide the process of interest rate setting with
additional weight and credibility.
On 1 August 1996, the NBS and selected commercial banks officially signed the Agreement on
the activities of a panel bank on the interbank money market. The so-called Statute of a panel bank on
the interbank money market, which determines
the duties of a panel bank, the way of granting
the statute and other internal regulations. was
also a part of the agreement.
The agreement was signed by the seven banks
(in alphabetical order): Investičná a rozvojová banka, a.s., Istrobanka, a.s., Poľnobanka, a.s., Poštová
banka, a.s., Slovenská sporiteľňa, a.s., Tatra banka,
a.s., and Všeobecná úverová banka, a.s. The ING
Bank, N. V. joined one month later. Apart from the
panel banks, the institute of so-called applicants
to or candidates waiting for the granting of the
full statute was created. Especially at the beginning, this panel bank waiting-room was exerting
pressure on panel banks to behave like real deposit market makers. Československá obchodná
banka, a.s. has been the first applicant; it became
a panel banks as early as during the following year
based on the adopted evaluation system.
As the above shows, the list of panel banks
has been changing several times over the first
years. At the end of year 2002, the structure stabilized and remained virtually unchanged until
the last meeting. The structure was made up by
Tatra banka, a.s., Slovenská sporiteľňa, a.s., and
Všeobecná úverová banka, a.s. These three institutions were panel banks virtually from the creation
of this group to its end. Further panel banks were
(ordered by the duration of their membership):
ING Bank, N.V., Československá obchodná banka,
a.s.., Citibank, a.s., and UniCredit bank Slovakia,
a.s. This stabilization was a result of structural
processes of the banking sector as a whole; on
the other hand positive pressure on the existing
panel banks on the part of potential candidates
disappeared at the same time. Let’s return, however, to the contribution of and the role played by
the panel banks during their existence in creating
a domestic financial market.
In the year following the official creation of the
institute, the panel banks were subjected to the
test of maintaining the BRIBOR quotation in an
environment and under conditions more complicated than those at the time of creation of the
BRIBOR. Development imbalances were threatening the economy and the central bank, in an
attempt to avoid unjustified credit expansion,
adopted a set of measures to prevent a negative development. After increasing the minimum
reserve requirements and introducing a foreign
exchange position for currency purposes in an
attempt to regulate indirectly the loan activities
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B I A T E C
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The development of the spreads between the bid and offered rate during the existence of the BRIBOR
(in basis points)
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
1993
1994
1995
1996
1997
1998
1999
2000
Suorce: NBS.
of banks in both domestic and foreign currency,
the NBS also abandoned its efforts to control the
interest rates. The adopted measures also applied
to the exchange rate regime, because the NBS
extended the Slovak koruna fluctuation band to
7%. The set of adopted measures resulted into a
restrictive character of monetary policy and had
a dramatic impact on the money market, the
development of which was sacrificed for overall
economic stabilization at that time.
The NBS together with the panel banks were
solving the complicated situation at many extraordinary meetings. At the expense of some
concessions, such as a temporary halving of the
quoted volumes, it was possible to maintain the
BRIBOR and to continue its publishing. However,
short-term outages have also occurred, particularly in extreme situations where deposit prices
increased over the 100% threshold as a result of
lack of liquidity on the market. The panel banks
have tried to solve this type of outages by replacing the interest rate fixing by monitoring known
from the past. This substitution was an attempt
to leave information about deposit price levels for
the money market; on the other hand, however,
banks were not bound by the obligation carry out
transactions at such indicative values.
The panel banks also tried to find a common
solution to the current situation by obliging
themselves to revise the quotation and performance of transactions with non-residential entities,
which were drawing on resources from the domestic money market to a considerable extent.
This problem or outages for the above mentioned
reason were eliminated in October 1998, when
the NBS cancelled the fluctuation band for the
fixed exchange rate and replaced it by a floating
exchange rate regime. This opened a space for
NBS‘ switch to interest rate control and performance of monetary policy. The NBS consulted the
panel banks regarding its preparation, mainly the
preparation of the part related to the implemen-
2001
2002
2003
2004
2005
2006
2007
2008
tation of a new performance of monetary policy
operations.
The subsequent application of the new approach with a considerable shift in the use of central bank instruments towards a more active influencing of the interbank money market as a means
to implement monetary policy targets from 2000
onwards brought further development and qualitative changes to the money market itself. Banks
with the highest activity on the market, i.e. the
panel banks, initiated these changes. The BRIBOR
was extended by adding 9 and 12-month maturities in the same year. Simultaneously to completing the money market curve, the spreads between
bid and offered rates were reduced. As manifestation of the qualitative shift, but mostly as a result
of a growth of confidence and liquidity on this
market, these spreads dropped even for the longest-term maturities to the level of 30 basis points
as early as in the first year of the application of the
new approach Based on a stabilized money market, the derivate market, particularly swap trades,
forward transactions or the so-called IRS (Interest
Swap Agreement) started to flourish again.
In the same year, the NBS passed the work of
BRIBOR rates fixing to the external agency Telerate Dow Jones, thereby also emphasizing the
standardization of the situation on the domestic financial market. The NBS took this step after
negotiations with and acceptance by the panel
banks. In line with the increasingly strong links
between the money market and real economic
processes and the associated increase in the interest in rates and the course of the trading itself,
the NBS together with the panel banks started to
monitor the SKONIA values. This rate was calculated based on source data for all sales of overnight
deposits carried out by the panel banks throughout the day.
Despite this gradual deepening and extension
of products on the money market, its participants,
particularly the panel banks, had to face some
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difficult situations even after the year 2000. This
applies primarily to the time when the NBS was
preventing unreasonable and fast Slovak koruna
appreciation by reducing sterilization operations.
At that time, the Slovak money market had some
features of the currently malfunctioning euro area
money market. The fixed money market rates deviated considerably from the official NBS rates. The
same situation can be seen now in the case of the
EURIBOR. Furthermore, the real trades between
the biggest market participants took places at
different levels than the fixed rates. In this case,
too, a parallel to the current euro area market can
be found. Like in the past, the panel banks tried
to solve this situation by negotiating at extraordinary meetings with the participation of the NBS.
Although these meetings had not always led to
satisfactory results for all of the participants, they
represented an important form of correct information exchange between the representatives of
the involved counterparties.
In has to be mentioned in this context that
even at meetings, at which solutions to the
current situation were supposed to be found,
a member of the NBS Bank Board frequently took
part in the meetings. This enabled feedbacks in
the form of opinions on the current performance
or NBS monetary policy procedures on the part of
direct market participants to arrive immediately
at the main decision-making body. In addition to
this type of negotiations, the NBS often consulted
the panel banks with respect to the technological and operational aspects of the performance
of monetary operations from agreements that
needed to be entered into for the performance of
monetary operations, through the issues of setting the optimum number of price quotations in
tender application forms, up to the determination
of the trade hours for marginal lending facilities.
And to do justice to the Slovak name referenčné
banky (the adjective “referenčné” can mean “reference” and “reporting” in Slovak), some panel banks
have reported daily on the current situation on
the money market or entire financial market. This
information has been processed subsequently
and has formed the source data for negotiations
of the executive body of the NBS.
Consultations between the NBS and the panel
banks played an important role and had a positive effect on the setting of the last autonomous
monetary operations even during the period of
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preparation of the transition to the performance
of monetary policy in the euro area.
It would be possible to list further elements
of cooperation of the NBS with the panel banks,
but I believe that even the above text explains
that this group has substantially influenced not
only the formation of the money market, but, to
a certain extent, also the actual performance or
implementation of monetary policy. For the NBS,
the panel banks have been representatives of the
banking sector with the strongest influence on
the working of the money market, with which it
was possible to solve various current problems
relatively quickly and operatively. I am convinced
that the cooperation has been tactful and mutually profitable over the whole period.
The main activity of the panel banks, i.e. the
quoting of rates and creation of the BRIBOR, came
to an end on the last business day of 2008. None
of the former panel banks has participated in the
creation of EURIBOR rates so far. Currently, there
are at least two reasons for this: the suspension
of the process of accepting new banks due to the
complicated situation on the euro area money
market and the fact that all the former panel
banks are now represented by their parent or
founding institutions.
Despite the facts mentioned above, I am convinced that, just like in the past, the NBS has to
and will continue co-operating with banks, particularly with the most active banks on the domestic money or financial market. For the time
being, the form of this cooperation and the partners are only crystallizing. I expect that banks will
need time to clarify the future role they will play
on the domestic financial market. On the other
hand, the NBS also needs time to identify those
new, maybe rehashed, key market players. Until
then, I consider it necessary to express my gratitude to all banks and particularly to their representatives, i.e. dealers, managers and department
heads – commercial bank treasurers, who have
contributed with their knowledge, proposals,
comments and activities to the existence of panel
banks all the time.
Last of all, I would like to express of word of
thanks to all NBS employees who have made up
the basic team ensuring meetings, or have participating actively in them, as well as to NBS Bank
Board members having participated in some of
the meetings.