Banking sector can withstand moderate shocks

KARACHI: The country’s banking sector has been able to withstand pressure emanating from the weakening macroeconomic scenario since 2007. Although the banks are facing increased credit risk, the overall sector is well placed to withstand moderate shocks as they boost their inventory of government securities.
This was stated by Governor State Bank of Pakistan Shahid H. Kardar in a message embodied in SBP Annual Report on the working of the Bank (Performance Review) for the year 2009-10 (FY10) which was released on Monday.
‘Furthermore, in response to emerging dynamics in the macro-financial environment, the SBP has rationalised the minimum capital requirement and its implementation schedule, this will provide breathing space to the banking sector in the difficult macroeconomic conditions, he said adding the State Bank continued to strive for a balance between price stability and support for economic growth while preserving the stability of the financial system during FY10.
While highlighting some of the key policy measures undertaken by SBP during 2010, Kardar said in response to a changing inflation outlook, SBP adjusted its stance on monetary policy.
The decline in inflation during the initial months of FY10 and a relative improvement in the macroeconomic situation, allowed the central bank to ease its monetary policy stance, he said and added that as the growing fiscal deficit and unexpectedly low external receipts increased risks of a relapse into macroeconomic instability, and as inflationary pressures resurfaced in the second quarter of FY10, SBP decided to pause the easing cycle and subsequently increased its policy rate in July and September 2010.
He said that SBP had increased the frequency of its monetary policy statements from four to six times a year.
Aiming to improve communication with the market, the monetary policy framework itself underwent significant change, when the SBP introduced an interest rate corridor in August 2009.
“This framework has anchored short-term interest rates and improved liquidity management in the money market,” he added.
The SBP governor pointed out that the exchange rate during 2010 continued to reflect market conditions, which helped narrow the external imbalance and improve macroeconomic stability.
He said foreign exchange reserves, which were at $12.425 billion at the close of FY09, increased by $4.325 billion, to reach an all time high of $16.750 at the close of FY10.
Kardar claimed that SBP decision to enhance banks’ foreign exchange exposure limit also strengthened the market’s capacity to handle larger volumes of foreign exchange transactions without additional volatility in the exchange rate.
He said the State Bank launched an electronic bond trading platform in January 2010 for the development of fixed-income markets. ‘This system, which primarily focused on government securities, also has the capacity to support trading of corporate debt instruments,’ he added.