SBP needs to stop being the banks’ errand boy

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SBP needs to stop being the banks’ errand boy

Jessica Alba turns 34 on Tuesday, and we're celebrating with a look back at her best bikini pictures.

SBP needs to stop being the banks’ errand boy

Jumping in and out of the sea, Jessica is clearly confident and didn't give snorkelling a second thought - dragging the goggles into the sea for a swim.

SBP needs to stop being the banks’ errand boy

Plus, she shows off plenty of PDA with husband Cash Warren on their many trips to St. Barts and Hawaii — we're not sure if their kisses or her many scorching bikini moments are hotter!

SBP needs to stop being the banks’ errand boy

Jessica's been no stranger to the two-piece and looks equally as fantastic in a swimsuit on screen as she does while lounging on the beach. The actress even rocked a bikini just four months after giving birth to her daughter Honor in 2008, and continued to flaunt her tan and toned body after having daughter Haven in 2011.

SBP needs to stop being the banks’ errand boy

Keep reading for a photo homage to Jessica Alba's insane bikini body, and check out more of the best swimsuit photos we've seen over the years.

If one reads the pronouncements emanating from the State Bank of Pakistan, one gets the impression that the central bank is a tough regulator, frustrated with the banks’ unwillingness to act as financial intermediaries for the economy. But if actions speak louder than words, then the SBP’s actions prove that it is willing to bend over backwards to give the banks what they want.

Take, for instance, the Rs689.1 billion open market operation (OMO) that the State Bank conducted on January 9. This followed the OMO on January 2 when the State Bank injected Rs513 billion.

Ostensibly, the reason for the operation was a shortage of liquidity at the banks that needed to be addressed. But the liquidity was self-inflicted by the banks. They deliberately keep much smaller balances of cash than necessary and rely on the State Bank’s OMOs to provide them with liquidity that they should not need assistance with in the first place.

Let us take a look at what happens in an open market operation. Effectively, the central bank lends the bank cash against their holdings of government bonds. The interest rate owed on this cash is lower than the interest rate earned on those bonds, which is why this is a profitable borrowing transaction for the banks. The State Bank buys government bonds for cash from the banks and then sells them back at face value minus a charge for the interest earned during the period the SBP held the bonds.

Why do the banks come to the State Bank for the cash? They need it to fund their day-to-day operations, things like cash needed for ATMs or to fund the normal withdrawals that occur on a regular basis at their branch networks, or even to pay back the banks’ own loans.

In theory, liquidity management is one of the core functions of a bank. They are supposed to take money from people who have it and lend it out to people who need it. But since depositors generally expect their cash to be available any time but borrowers typically do not return the money for much longer periods, banks are expected to manage the difference in liquidity expectations by ensuring that they have enough cash to handle ordinary levels of withdrawals while still have a profitably large loan book.

The situation in Pakistan

In Pakistan, however, the banks and finance ministry have gotten greedy and the State Bank is effectively acting as the errand boy for both. The banks like the idea of holding far less cash than they need to – since cash earns them nothing – and relying on the State Bank’s OMOs to cover their needs when they fall short. And the finance ministry likes this arrangement because it means that the banks have more money to lend to the government by buying Treasury bills and Pakistan Investment Bonds (PIBs).

For its part, the State Bank likes to talk tough. Ever since the governorship of Shahid Kardar, the SBP has been consistently berating the banks for failing in their role as financial intermediaries for the economy, explicitly and repeatedly saying so in monetary policy announcements, quarterly reports on the economy, etc. Former SBP Governor Yaseen Anwar went so far as to raise their costs of deposits to encourage them to lend more to the private sector.

But even he did not end the OMOs, which continue to grow almost consistently with the size of the banking system. Until the SBP ends the OMOs, the banks will continue to make abnormal profits on what should be a non-earning asset: cash. And as a result, they will feel less pressure to make the effort to earn the extra 100-200 basis points on their lending portfolio that they could earn if they switched from buying government bonds and do their real jobs, which is to lend to the private sector.

Published in The Express Tribune, January 10th, 2015

Farooq Tirmizi

CEO, Elphinstone

Farooq Tirmizi is the founder and CEO of Elphinstone, the financial services firm that operates SmartRupee.

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