| ¿What are TES (Treasury bonds)? |
TES are domestic public debt bonds, issued by the government and managed by Banco de la República.
| ¿What are bank reserves or stocks? |
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The main function of financial intermediaries (banks, savings corporations and building societies, financial corporations, etc.) is to capture resources from the public and use these resources in order to provide loans. Given the nature of their business, financial institutions should maintain part of their funds as liquid assets and reserve assets, in order to cover fund withdrawals by their clients. With the aim of reducing the risk for public deposits in the financial system, the Banco de la República determines that reserve assets cannot fall under a minimum value that depends on the amount of deposits received by the intermediary. The percentage of resources that financial intermediaries capture from the public and which must be frozen is known as bank reserves. Financial intermediaries can either keep these reserves as cash in their safes, or in their accounts in the Banco de la República. The reserve percentage is not the same for all kinds of deposits (savings accounts, current accounts, fixed term deposits, etc.). This percentage varies, depending on the greater or lesser liquidity of the deposit. For example, current accounts have higher reserves than the other types of deposits, given that the users of these accounts can withdraw their money at any given moment and without restrictions, which is not the case for money invested in fixed term deposits or in savings accounts.
Banco de la República can also use reserves indirectly in order to increase or decrease the quantity of money that circulates in the economy. For example, when reserves rise, financial intermediaries have fewer resources for lending, as they have to keep a higher reserve percentage. Thus, with less money to lend to the public, less money enters into circulation and liquidity decreases. On the other hand, when the Banco de la República lowers reserve percentages, this enables banks, corporations and other financial intermediaries to have more money available to lend to the public, and therefor the quantity of money in circulation increases.
However, this is an instrument for guaranteeing the availability of resources to clients, rather than for regulating the amount of money in circulation.
| ¿What are the PUT and CALL options? |
These are mechanisms for the intervention of Banco de la República in the foreign exchange market. Since September 1999 the exchange rate in Colombia floats freely, which means that the price of the peso with respect to the United States dollar fluctuates according to market conditions. Therefore, if the demand for dollars in the foreign exchange market rises, the exchange rate will rise; whilst if the dollars on offer in the foreign exchange market increases, the exchange rate will drop.
Banco de la República’s Board of Directors adopted the exchange rate floatation regime after abandoning the exchange band system that had operated since 1994. The band is an instrument that enables the exchange rate to float within parameters established by the exchange authority, and at the same time, prevent extreme volatility (sudden changes in the exchange rate) that make operations in the rest of the world difficult for Colombia’s residents. When the band was at its peak the issuing authority would sell the dollars requested at a previously announced exchange rate, whilst when the band was at its lowest level, the issuing authority would buy the dollars it was offered.
Upon adopting exchange rate floatation the Board of Directors decided that this system should be as clear and transparent as possible, and therefore in November 1999 the Board established the rules for the Bank’s intervention in the exchange market. These rules correspond to two of the Board of Director’s objectives regarding the exchange system:
1. Accumulation of international reserves. This objective implies that the bank should purchase foreign currency from the exchange market at moments when it considers that it would be opportune to raise the country’s external liquidity level in order to guarantee eternal payments and minimise the probability of speculative attacks against the currency.
- Moderation of the volatility of exchange rates. This objective implies that the Bank would intervene in the exchange market with the aim of mitigating excessive fluctuations in the exchange market, with the understanding that its intervention does not modify the exchange rate’s tendency.
Based upon these two objectives, two exchange rate intervention mechanisms for Banco de la República were established. The mechanisms adopted are transparent, coherent with the current exchange rate floatation regime agreed on the 25th September 1999, and do not seek to defend a particular exchange rate level.
- Mechanism for the accumulation of international reserves (PUT Options).
Every month, options or dollar sale rights to Banco de la República are auctioned, these can be carried out whenever the Representative Market Rate (RMR) is below its mobile average of the last 20 days. This condition guarantees that Banco de la República exclusively purchases dollars when the RMR is below its tendency, that is, when there is an ample supply of dollars in the market.
The Board of Directors fixes the quotas for the auction and the options are valis for one month. This mechanism aims to increase the level of international reserves to the desired levels.
2. Mechanism to avoid excessive volatility in exchange rates.
When the RMR is situated at least 2% above or below its mobile average of the last 20 working days, Banco de la República carried out auctions of options or sales rights or foreign currency purchase, respectively. The evident aim is to limit excessive volatility of the exchange rate, when this occurs. Currently, the Bank intervenes by auctioning options for 180 million US$, which are valid for one month. After making this intervention, the bank can act at its discretion in the exchange market during the one-month validity of the options, as long as the previously mentioned conditioned is applied with.
In December 2001, the Board of Directors approved an occasional mechanism of “non-accumulation” of international reserves (CALL options) with the aim of contributing to the moderation of inflationary pressures that arise from excessive devaluation of the peso, caused by a strong transitory impact in the economy.
Therefore, this mechanism can be considered as an additional tool to the interest rate for the task of maintaining inflation levels that are close to the established goals. In operational terms, auctions of options and purchase rights for the Banco de la República can take place when the RMR exceeds the mobile average of the last 20 days.
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