Банкеръ Weekly



It sounds incredible but it's true: a significant part of the money held by banks does not bring them profit. This is money that they have to keep in accounts with the Bulgarian National Bank (BNB) without receiving interests - the so called lowest required reserves. According to the Banks Act, the amount of the lowest required reserves is 8% of the accounts and deposits of individuals and companies in the banks. This money is kept in BNB in order to guarantee current payments on the financial market. At the same time, however, these reserves have another function as well. They may indirectly fill the state budget. Here is the scheme: the central bank does not pay the banks interests on the lowest required reserves and does not require maintenance costs. At the same time, the Bank uses this money to buy foreign currency which is later invested in deposits in foreign banks or in foreign securities. That's how the lowest required reserves form a great part of the BNB revenues. The excess of revenues over expenses of the central bank is paid to the budget every year.It means that without suspecting it, banks customers provide additional financing to the Treasury. In 2003, the lowest required reserves have contributed BGN170MN to the budget. According to the BNB 2004 budget, the same amount is expected next year. The Central Bank statistics show that credit institutions have blocked BGN644MN as lowest required reserves as of October 24, 2003. This is money entrusted by bank customers which brings them interests from 1.5 to 6% depending on the term and the type of the deposit or account. It turns out that the lowest required reserves not only fail to bring profit to the banks but also force them to spend more money. The problem about the lowest required reserves has always been a painful one for the banks. In 1997, reserves amounted to 11% of the deposits and accounts held in the banks. In 1999, BNB reduced their amount to 8% in an attempt to use the saved resources as crediting stimulation. But even this level of the lowest required reserves appears to restrict their operations.According to Dimitar Kostov, Chairman of the Association of Commercial Banks, maintaining lowest required reserves leads to raising the interests on credits - by at least 0.5 percentage points. Of course, this could be avoided if banks made profit from the money they kept as lowest required reserves in the Central Bank. Therefore, the Bank's governing body should think over the alternatives.According to financiers, BNB could allow the credit institutions to block government securities or bonds of first-class financial institutions and companies with a lowest rating AA-, instead of keep money as lowest required reserves. Unlike the money held in interest-free accounts in BNB, securities blocked as lowest required reserves will bring the banks profits exceeding their expenses on deposits and accounts of individuals and companies. This will allow the banks to reduce interests on the credits they launch and thus increase the access to crediting resources.

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