Evolution of the Reserve Bank's liquidity facilities The author gratefully acknowledges the thoughtful comments of
Reserve Bank of New Zealand: Bulletin
ARTICLES 1 Introduction Central banks have a number of functions. A key function is the provision of cash to the economy and the banking system in particular. Providing cash to the public as notes and coins enables the settlement of payment obligations between individuals. The electronic equivalents of notes and coins, which enable commercial banks to settle wholesale payment obligations, are the balances in the settlement accounts that the Reserve Bank offers to the commercial banks. The
... of funds for the settlement accounts is the various liquidity operations undertaken by the Reserve Bank-the standing facilities and open market operations. Generically, there are two facilities that effect the provision of cash to the settlement accounts: the standing liquidity facilities, which are on-demand borrowing facilities, and the open market operations. This article discusses developments in the Reserve Bank's liquidity facilities over the past decade. Over this time, there have been two major changes. The first of these was in 1999 when the way in which the Reserve Bank implemented monetary policy changed to the official cash rate (OCR) regime. The second was in 2006 when the Reserve Bank adopted a 'fully cashed up' settlement account system. 2,3 This second change was the result of fundamental changes in our framework for thinking about a central bank's domestic market activities. It also enabled the Reserve Bank to be more flexible regarding changes. The article proceeds as follows. In section 2, we provide an overview of the purpose of the Reserve Bank's liquidity management system. The way this is put in practice is explained in more detail in box 1, "Assessing the appropriate level of settlement cash", and box 2, "Tools for injecting and withdrawing liquidity". The motivation for the 2005/6 liquidity management review and the changes made at that time is provided in section 3, "Making liquidity provision systems more robust and scaleable: 2003-2007". The section includes discussion on the development of the 'Kauri' market in New Zealand and the introduction of a tiered approach to remuneration settlement account balances. With the advent of the current crisis conditions, the liquidity facilities were widened and adapted. The Reserve Bank's approach to this is provided in section 4, "Enhancements to liquidity facilities to address crisis conditions-a question of confidence". Included in this section is a discussion on funding the New Zealand banking system in a crisis. The article closes with a discussion on the coherence of the facilities and their robustness in section 5 and closing comments in section 6. In this article, the evolution of the liquidity management regime over the past few years is detailed. This evolution is placed in the context of the prevailing financial market stresses. The robustness and adaptability of the system to a variety of shocks is discussed. Particular mention is made of the steps taken in the past year to ensure the stability of the New Zealand financial system. times during the banking day to raise cash to effect their payments. The open market operations had to be finely tuned to balance the Crown's income and expenditure. As a result, the operations were highly demanding on both the Reserve Bank and the commercial banks. For further details of how the previous regime worked, see Frazer (2005).