Challenges in the money market like market fragmentation and what ends up looking like liquidity hoarding can be disruptive for the interbank market’s role as an effective intermediary, said Adnan Zaylani Mohamad Zahid, deputy governor of Bank Negara Malaysia in a recent speech.
When liquidity is unevenly distributed, it can lead to volatility in rates and undermine the market’s ability to function effectively. To address this, the central bank needs to focus on creating a more efficient interbank market.
“One area where we will be pushing for is in the market infrastructure by expanding the network of interbank lines among players so we can achieve better price discovery and ensure smoother liquidity distribution. Other areas to further improve on liquidity intermediation includes our introduction of the 7-day reverse repo which has received good response from the market,” he said.
“As we approach the year end, we thus wouldn’t expect similar situations of past years where rates spike, as interbank players compete for deposits. We also expect that with the recent Liquidity Risk Policy Document issued last month, which puts out requirements for LCR disclosure on an average basis, this pressure will be much less,” he added.