BoG unveils new liquidity policy to bolster financial stability

Towards achieving its financial stability objective, the Bank of Ghana (BoG) has developed a policy and operational framework for providing Intraday Liquidity Facility (ILF) and Emergency Liquidity Assistance (ELA) within the banking sector.

The central bank said the framework has been designed to address weaknesses that were identified during the recent banking sector crisis, and it aims to promote transparency and better liquidity planning by financial institutions while protecting the balance sheet of the BoG.

During the banking crisis, the BoG revoked the licences of nine universal banks, 347 microfinance companies, 39 microcredit companies, 15 savings and loans companies, eight finance house companies, and two non-bank institutions.

According to the policy framework document, the ILF is to support efficient functioning of the payment and settlement systems, whereas the ELA will provide liquidity support to eligible and solvent banks, savings and loans companies, and finance houses (BSFs) facing temporary liquidity challenges.

The bank said the two liquidity instruments are expected to supplement the Global Master Repurchase Agreement (GMRA)-backed reverse repurchase facility that it currently provides to banks as part of its monetary policy framework.

The BoG has already set up the Ghana Interbank Settlement (GIS) system to settle high-value interbank payment obligations in real time.

Under this system, participating banks are required to maintain sufficient positive balances in their settlement accounts to meet their obligations within the GIS system on a real-time basis.

This has largely help prevent settlement failures which could adversely impact financial stability and monetary policy transmission.

Acknowledging that prolonged liquidity shortages could fuel solvency challenges, with ramifications for financial stability, public confidence and the economy, the BoG said it will continue to discretionarily exercise its lender of last resort function, subject to defined preconditions of the ILF and ELA.

The ELA accessed by a regulated institution will solely be used for honouring customer withdrawals and meeting maturing non-capital-related debt obligations, as shall be indicated in the request to the BoG. All other uses, including payments to affiliates, insiders and related parties, are prohibited.