CALL MONEY PRESSURE FROM LARGE GERMAN BANKS
One or two large West German banks
effectively drained the domestic money market of liquidity at
the end of the month in order to achieve higher rates from
their overnight deposits, money dealers said.
    As a result, call money soared in active trading to around
the Lombard rate of five pct from 3.70/80 pct yesterday as
banks found themselves short of minimum reserve funds.
    Bundesbank figures showed that banks held an average daily
51 billion marks in interest-free minimum reserve assets at the
central bank over the first 29 days of the month.
    Though this was above the March requirement of 50.7
billion, actual holdings at the weekend were 44.2 billion.
    To meet the daily average, dealers said, banks must raise
holdings by two billion marks to 46.3 billion today and
tomorrow. But liquidity was tight in early business because
banks excessively took up the Bundesbank's offer for sale of
Treasury bills on Friday. This provides a rate of 3.50 pct for
three-day deposits and is an effective floor to the market.
    Though some liquidity, from bills bought on Thursday,
flowed back into the market today, the bulk would not return
until tomorrow, the start of the new month, dealers said.
    Dealers said the large banks, which they did not name,
commanded short-term money requirements of as much as five
billion marks or so.
    With a knowledge of their own needs until the end of the
month, the banks bought excessive amounts of treasury bills,
draining liquidity for three days. When other banks sought
funds, rates rose and large banks were able to place excess
funds on deposit at a considerably higher average return.
    One senior dealer said the Bundesbank, with advanced
knowledge of the market's needs, should have curtailed its
sales of treasury bills on Friday.
    Though dealers only late in the day learn of the total
minimum reserve holdings of the previous day, the Bundesbank
has an immediate overview of the situation and could anticipate
the strength of demand for funds the following day, he said.
    "(Bundesbank dealers) could easily have said we are not
selling any treasury bills or we're not selling them in this
amount," he said. "If the Bundesbank wants to finely steer the
market then they should avoid such excesses. Tomorrow it will
be different. Call money will fall back to 4.0 pct or so."
    But the Bundesbank would not approve of the sharp jump in
rates, given the delicate state of currency markets.
    International central banks have been at pains to prevent a
dollar fall against major currencies, including the mark.
Dealers said a rise in call money gives the mark a firmer
undertone, contributing to downward pressure on the dollar.
    "The whole tender policy is to have a call money of between
three and four pct. In that case the excesses as we have today
cannot be very popular," the senior dealer said.
    Dealers said the large banks probably achieved average
rates of return on their excess funds of between 3.75 pct or
four pct. This is a higher return than they would have earned
without the excessive draining through the treasury bill
mechanism.
    Because of the currency situation and the wage negotiations
between Germany's major employers and the unions, the
Bundesbank would be very unlikely to make any changes to
monetary policy at its council meeting on Thursday, they said.
    Bundesbank figures showed that banks fell back on the
Lombard emergency funding facility to draw down 1.5 billion
marks yesterday as rates began to tighten in late business.
 REUTER
