MGT604 Management of Financial Institutions Assignment 1 Solution Fall 2012

ASSIGNMENT:
A link to an article titled as “Reinforced Monetary Easing” was provided to you earlier through announcement with the instruction to comprehend the article. It is hoped that you would have studied the article and have made a better understanding of the phenomena delivered through article. Keeping the said article into consideration, you are required to answer the following questions:
Questions
1. What is aim of additional measures announced in monetary policy statement? (5)

The additional measures announced along with the monetary policy statement (MPS) are aimed at making it difficult for banks to sit on piles of liquidity only to invest in government papers rather than lending to private sector businesses. By dashing hopes for deeper rate-cut being speculated in the markets, the central bank has shown its ability to strike a balance between spurring growth through lower interest rates with minimum impact on the savings rates.



2. What is requirement of capital reserve ratio for commercial banks and why it has been changed? (5)

To push banks towards meeting genuine credit demand of businesses, the central bank has allowed banks to let their cash reserve ratio or CRR fall to three per cent from four per cent in daily liquidity management. And they have also been allowed to maintain a mandatory five per cent CRR now on fortnightly instead of weekly basis. The purpose is let banks manage their liquidity shortages without necessarily going to the SBP to borrow overnight funds. It had come easier for banks to over-invest in government papers and then borrow overnight funds to overcome liquidity gaps created due to over-investment in these papers.

3. Why Government borrowings cannot be cut down? (5)

The rate cut is going to keep the government borrowing cost under control, creating some fiscal space for it but it is also going to constrain growth of its non-bank borrowing. Growth in investment in National Savings Schemes has already been affected after downward revision of their rates of return following the 150bps rate cut in August. And if the rates are reduced further in response to the recent 50bps cut in SBP policy rate, “I fear that the government would find it too difficult to borrow much through this non-bank source,” said an official of Central Directorate of National Savings.


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