The Bank of Lithuania is resuming regular time deposit auctions
Taking account increasing bank reserves at the central bank and seeking to reduce excess litas liquidity, which formed due to a temporary decrease in the amount of national cash in circulation prior to the euro adoption, the Bank of Lithuania is resuming its time deposit auctions. Plans are to hold them every week up until the euro adoption in 2015.
“With the euro adoption date approaching, the amount of cash in circulation is decreasing and it is likely that it will continue to decrease right up to the euro adoption in 2015. In addition, the surplus bank funds in litas at the Bank of Lithuania will significantly increase. Due to more favourable short-term investment opportunities in the euro money market, banks have the incentive to exchange these funds into euro and this results in a decrease in the Bank of Lithuania’s foreign reserve assets,” says Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
According to him, the proposed alternative in the form of time deposits at the Bank of Lithuania will not only help to manage the liquidity of the banking system, but it should also prevent sudden fluctuations in the Bank of Lithuania’s foreign reserve assets and an involuntary sale of a part of the investments due to temporary changes in the amount of cash in circulation.
As can be seen from the experience of countries that adopted the euro over recent years, the amount of national cash in circulation will significantly decrease prior to the euro adoption. A more rapid reduction is usually recorded in the second half-year, while the most intense — in December, just before the euro adoption, when more and more people, seeking simpler (automatic and free of charge) exchange of the national currency to euro at the turn of the year, place their money in bank accounts. Part of the population can choose to exchange litas to euro prior to the euro adoption, even though such transactions wouldn’t be favourable for them, as currency exchange taxes, applied by banks, would have to be paid.
Due to the aforementioned reasons, excess liquidity in the banking system is temporary, because with the euro adoption, due to the established cash usage habits, the amount of cash in circulation gradually returns to previous or close to previous levels.
At first, every week, on Tuesdays, seven-day deposit auctions will be organised. Later, deposits with longer maturities may also be offered. The winners of the deposit auctions will be those banks that offer the lowest interest rates.
The first time deposit auction at the Bank of Lithuania took place on 28 September 1997. In total, 81 deposit auctions were organised. Up until 2 February 2000, 63 auctions were organised, with LTL 4.5 billion in deposits accepted; while from 19 September 2011 until 16 April 2012, 18 auctions took place and LTL 7.6 billion in deposits were accepted.