One of the most important indicators of a bank's condition is the liquidity of its resources. A high level of this indicator means that this financial institution is able to pay its obligations both in the current and future periods. When the liquidity, and hence the solvency, of the bank falls, then refinancing is necessary. This means that the Central Bank of the state must allocate additional funds together with interested investors.
Fundamentals of Financial System Stability
The task of any Central Bank is to timely note the time gap in the bank's liquidity, analyze it and, if necessary, find funds to liquidate it. Refinancing is a process that allows you to:
- Ensure the continuity of settlements in the national economic system by guaranteeing the liquidity of each individual bank.
- To control the situation in the monetary market withusing interest rate setting.
However, it is important to understand that refinancing is not a permanent source of additional cash for financial institutions. The central bank is not interested in supporting a troubled financial institution on a regular basis. Therefore, any bank should strive to attract additional funds from new customers and shareholders.
Basic principles of competent refinancing
To ensure the stability of the monetary system of the state, the Central Bank, when providing additional funds to other financial institutions, should be guided by the following provisions:
- Preliminary setting of limits and volumes of lending.
- Refinancing of banks should be consistent with the objectives of the approved monetary policy.
- The needy financial institution must be free of debt to the Central Bank and be able to repay the loan in the future.
- Having additional funds securely secured.
- Correct loan amount corresponding to the value of the collateral.
- The refinancing rate cannot be lower than the discount rate.
Types of loans
Refinancing is the last chance for most banks. They turn to the Central Bank when all other ways to raise free funds have already been exhausted, and the debt to customers still remains. There are two main types of loans:regulatory and specific. The former are permanent financial instruments and are used to control the money market. Specific loans are used to stabilize situations with a lack of liquidity in specific banks. The Central Bank can also use REPO and SWAP operations to regulate the market.
Functioning mechanism
Refinancing is a process that looks like this:
- The bank is having solvency problems.
- The Central Bank analyzes the situation and makes a decision on issuing a loan, for example, $10 million for one year.
- A commercial bank lends money to its customers at a higher interest rate than the refinancing rate.
- At the end of the term, he returns 10 million with a surcharge of the Central Bank.
- The money received as a result of this operation is redistributed and increases the solvency of the bank.
The Central Bank does not work directly with the population, because in this case it would have to control millions of small borrowers. Therefore, commercial banks act as intermediaries between him and ordinary people.
Refinancing rate
According to the Federal Law "On the Central Bank of the Russian Federation", the Central Bank can provide additional funds for a certain period on a repayable basis to credit institutions to solve their liquidity problems. The refinancing rate is a tool that controls theinterest on deposits and loans. Its decrease is beneficial to borrowers, while depositors are deprived of part of their income. The refinancing of the Central Bank is carried out at a rate established or chosen on the basis of market mechanisms.
Rationing of interest
Before 2010, the maximum amount that was recognized as an expense was equal to the following value: refinancing rate1.1. Now the second multiplier has been increased to 1.8 for ruble borrowings. If one of the indicators changes during the term of the loan agreement, a double calculation should be made. As for contracts using foreign currency, the refinancing rate is not used here. The maximum level that can be considered an expense is 15%.
Areas of application and impact
Refinancing of banks at a certain rate in the Russian Federation has an impact not only on the financial and credit institutions themselves, but also on an ordinary citizen. In particular, the following cases can be distinguished:
- Taxation of interest income on deposits (according to the Tax Code of the Russian Federation, the rate of 35% is set in excess of the amount calculated based on the refinancing rate).
- Calculate payments for delayed money owed to an employee (including vacation pay).
- Calculation of interest on a tax or fee (its percentage is one three hundredth of the established refinancing rate).
The process of lending by the Central Bank to commercial banks is an important regulator of the financial system of the state. The development of the economy largely depends on it, since the populationtends to trust their resources to banks only if they are sustainable.
