Colombian Central Bank’s March 23, 2020 liquidity provision measures

COLOMBIA - In Brief 24 Mar 2020 by Juan Carlos Echeverry

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In recent weeks, Colombian asset managers different from banks, have been affected by a flight to liquidity, which in a short span reduced their assets under management from COP 87 trillion to around COP 60 trillion. On March 18, 2020, the Central Bank 1) admitted to the group of institutions with access to auctions of repos with public debt and to its liquidity window more intermediaries additional to banks, namely: severance and pension funds (AFP), insurance companies, funds managed through trusts, stock brokers, and investment management companies. 2) It admitted to its repo auctions not only TES, but also high-quality private debt instruments. 3) It admitted private debt instruments with 90 days maturity and extended the maturities of liquidity operations (REPOS) with public debt instruments to 60 days; until then, the maximum maturity had been 30 days.In spite of these measures, during the following days AUM in those newly admitted institutions kept declining, as agents opted for redeeming positions and depositing excess liquidity in Banks’s savings accounts and time deposits. In turn, banks did not use it to provide liquidity to those intermediaries under pressure. The fact that there was no “final Buyer” for private debt instruments was causing: i) further flight to liquidity, ii) furhter haircuts, and iii) forcing their owners or headquarters (if there was any) to purchase some of those assets and providing urgent liquidity. As a result, there were cries for the Central Bank to adopt QE, admitting private debt instruments not only for repo auctions but for final purchase. A key element was that the assets under stress were not toxic, but high-quality-issuer co...